Politics Japan has gone it’s own way on fighting inflation

[Alite]

I have just read an article from the Conversation on Japanese interest rate policy and would love other peoples opinion.

Japan has gone its own way on fighting inflation – can NZ learn from a global outlier?

With an inflation rate peaking at just 4.4%, Japan seems to be getting something right about managing economic pressures. How does it do this, and should New Zealand revisit its own strategies?

theconversation.com

A few months ago I was chatting with my father, brother and wife about interest rates and we came to the conclusion that Australia’s current high inflation is clearly caused by supply issues and that the RBA increasing interest rates (which dampens demand) is only making things worse.

If the article above is correct, the Bank of Japan, and Japan‘s inflation numbers, seem to validate that conclusion.

Increasing interest rates primarily takes money from individuals with a mortgage and businesses-with-finance (most of them) and gives it to the RBA who then, in a round about way, give it to the government = another form of tax. What is worse, increasing interest rates pushes up rents, which are already high, and the cost of building a house (constricting supply and so pushing up rents). Then along comes the Vic Government with a new extra land tax on property investors to “pay for the CoVid years” which will only push rents higher. We concluded that it is total economic and social Madness.

My family group, with the lubrication of a glass of wine or two, came up with the following alternate ideas that revolve around lower interest rates and lower rent provider cost and so lower rents.

Instead of increasing interest rates:
A: for 2 years only, increase the % of our pay packet that we put into super. That way we all keep our money (instead of giving it to the government) but don’t have access to it until later. Yes this suppresses demand but it is better than giving money to the RBA / government and will not push up rents.
B: for 2 years only, increase the GST. Again this suppresses demand but the pain is spread out across the whole population and it will not push up rents.
C: Have people with a mortgage or a business with finance pay off a higher % of their principal (details on how to be worked out later). This sets up the recovery later.
D: Give points towards immigration to people (apparently there will be a push for increasing immigration in 2024) who build a house thereby increasing housing supply and pushing down rents.

The two largest housing components of the Consumer Price Index (CPI) basket are rents and new dwelling purchases by owner-occupiers, which together account for around one-sixth of the CPI basket.

Lower rents mean lower inflation. And yet everything that is being done by the Vic Government and the RBA are pushing up and costs. It is baffling.

Were we wrong or is the RBA’s stated policy to dampen demand, push up unemployment and reduce investment in our economy the better way to go?


I’d love some opinions.

 

[owen87]

I have just read an article from the Conversation on Japanese interest rate policy and would love other peoples opinion.

Japan has gone its own way on fighting inflation – can NZ learn from a global outlier?

With an inflation rate peaking at just 4.4%, Japan seems to be getting something right about managing economic pressures. How does it do this, and should New Zealand revisit its own strategies?

theconversation.com

A few months ago I was chatting with my father, brother and wife about interest rates and we came to the conclusion that Australia’s current high inflation is clearly caused by supply issues and that the RBA increasing interest rates (which dampens demand) is only making things worse.

If the article above is correct, the Bank of Japan, and Japan‘s inflation numbers, seem to validate that conclusion.

Increasing interest rates primarily takes money from individuals with a mortgage and businesses-with-finance (most of them) and gives it to the RBA who then, in a round about way, give it to the government = another form of tax. What is worse, increasing interest rates pushes up rents, which are already high, and the cost of building a house (constricting supply and so pushing up rents). Then along comes the Vic Government with a new extra land tax on property investors to “pay for the CoVid years” which will only push rents higher. We concluded that it is total economic and social Madness.

My family group, with the lubrication of a glass of wine or two, came up with the following alternate ideas that revolve around lower interest rates and lower rent provider cost and so lower rents.

Instead of increasing interest rates:
A: for 2 years only, increase the % of our pay packet that we put into super. That way we all keep our money (instead of giving it to the government) but don’t have access to it until later. Yes this suppresses demand but it is better than giving money to the RBA / government and will not push up rents.
B: for 2 years only, increase the GST. Again this suppresses demand but the pain is spread out across the whole population and it will not push up rents.
C: Have people with a mortgage or a business with finance pay off a higher % of their principal (details on how to be worked out later). This sets up the recovery later.
D: Give points towards immigration to people (apparently there will be a push for increasing immigration in 2024) who build a house thereby increasing housing supply and pushing down rents.

The two largest housing components of the Consumer Price Index (CPI) basket are rents and new dwelling purchases by owner-occupiers, which together account for around one-sixth of the CPI basket.

Lower rents mean lower inflation. And yet everything that is being done by the Vic Government and the RBA are pushing up and costs. It is baffling.

Were we wrong or is the RBA’s stated policy to dampen demand, push up unemployment and reduce investment in our economy the better way to go?


I’d love some opinions.

The problem is the RBA only has one lever to pull; interest rates. Most of the other stuff isn't possible for the RBA, and the major parties don't want to do it because it won't win them votes.

It's bleedingly obvious that the interest rate rise has stripped money away from those with the least disposable income already (mortgage holders, and by extension, renters) and given more to those with savings and no mortgages (e.g. older people) who are spending up big.

Increasing the GST specifically hits discretionary spending given a large number of food items are GST exempt, so it would strip money from those who can most afford it (the people buying non-essential items) instead of the least, and would likely be much more effective in the process, but wouldn't win votes.

This way the Government gets to blame the RBA for being the bad guy and pretend there's nothing at all they could do, so don't use it as a reason to vote against them.

 

[Alite]

The problem is the RBA only has one lever to pull; interest rates. Most of the other stuff isn't possible for the RBA, and the major parties don't want to do it because it won't win them votes.

It's bleedingly obvious that the interest rate rise has stripped money away from those with the least disposable income already (mortgage holders, and by extension, renters) and given more to those with savings and no mortgages (e.g. older people) who are spending up big.

Increasing the GST specifically hits discretionary spending given a large number of food items are GST exempt, so it would strip money from those who can most afford it (the people buying non-essential items) instead of the least, and would likely be much more effective in the process, but wouldn't win votes.

This way the Government gets to blame the RBA for being the bad guy and pretend there's nothing at all they could do, so don't use it as a reason to vote against them.

Well said.

 

[Mofra]

Governments want free reign over fiscal policy and leave the heavy lifting to a nominally 'independent' central banks to deal with monetary policy with merely a blunt instrument to do so.
The problem is neither fiscal nor monetary policy operate in vacuums. They influence and impact upon each other.

Joseph Stiglitz proposes temporary wealth taxes as a measure to both fight inflation and for budget repair. He even proposed the measures this year on a tour of Australia. I don't think any governments have the courage to take any responsibility for policies that impact upon monetary supply though.

 

[Alite]

As rightly said by owen87 the RBA has only 1 lever to pull … it is a sledge hammer trying to hit the hole of supply. How does a hammer or lever impact a hole? It is patently dumb.

If proper Government policies are in place then the RBA needs to do nothing. If my presented concepts of A,B,C and D were in place, the RBA would have no reason to put up interest rates. And the RBA‘s best economist (Lowe) would still have a job.

I say, put the RBA “cash rate” back to 2% or under ASAP. Keeping it high hurts everyone*

Your quote (granted without you agreeing) that “Joseph Stiglitz proposes temporary wealth taxes as a measure to both fight inflation and for budget repair.” Wealth tax can be put on anything (and if is on Tobacco and alcohol). It a method of control. But it is political and not relevant in terms of inflation.

The point that matters is getting down inflation.

Wealth taxes do nothing of magnitude to reduce inflation … They are political stunts designed to distract.

* = I acknowledge that the a higher interest rate helps keep the $Au higher. But seriously… if we are going to have inflation, at least have inflation that helps us have jobs and export.

 

[Alite]

Governments want free reign over fiscal policy and leave the heavy lifting to a nominally 'independent' central banks to deal with monetary policy with merely a blunt instrument to do so.
The problem is neither fiscal nor monetary policy operate in vacuums. They influence and impact upon each other.

Joseph Stiglitz proposes temporary wealth taxes as a measure to both fight inflation and for budget repair. He even proposed the measures this year on a tour of Australia. I don't think any governments have the courage to take any responsibility for policies that impact upon monetary supply though.

You have stated the failing of our system well. Those concepts end in the rich … and the unhappy.

 

[Alite]

Japan has -0.1% interest rates and “good” inflation.

How does that happen?

 

[Mofra]

Japan has -0.1% interest rates and “good” inflation.

How does that happen?

Japan also had a long term reduction in property prices across multiple governments over many years, a politically unpalatable situation here.

And an open 'printing press' so their major structural economic issue has been deflation for quite some time. They have unique challenges (add the lowest birthrate in the world into the mix) that makes their situation hard to compare to Australia & NZ.

 

[Alite]

Japan also had a long term reduction in property prices across multiple governments over many years, a politically unpalatable situation here.

And an open 'printing press' so their major structural economic issue has been deflation for quite some time. They have unique challenges (add the lowest birthrate in the world into the mix) that makes their situation hard to compare to Australia & NZ.

Agreed: Japan also buys their own debt… ? How does that work? and has had stagflation at times. They have an aging population and are close to their supply…. . Yes, Yes and Yes. The are many differences.

But how does the RBA putting up interest rates solve the supply issue that is causing Australia’s Inflation?

 

[Alite]

Agreed: Japan also buys their own debt… ? How does that work? and has had stagflation at times. They have an aging population and are close to their supply…. . Yes, Yes and Yes. The are many differences.

But how does the RBA putting up interest rates solve the supply issue that is causing Australia’s Inflation?

I read that it takes 18 months for an interest rate rise to actually affect the target area that the RBA is trying to suppress.

And the area that they really want to suppress is …. wait for it…. business investment. They want to shrink our economy.

They state that they want increased unemployment. If that is not Wrong I don’t know what is Right

 

[undefined]

The author raises some valid points though the article does lack rigour in comparison.

It's no secret Japan faces its own challenges; an ageing workforce, declining birth rates and stifling productivity don't bode well for future growth. One would presume such factors balance out their loose monetary policy.

 

[Alite]

The author raises some valid points though the article does lack rigour in comparison.

It's no secret Japan faces its own challenges; an ageing workforce, declining birth rates and stifling productivity don't bode well for future growth. One would presume such factors balance out their loose monetary policy.

.

As a youngster I remember being told that the Japanese will take over / buy out the world…

… and then at some stage finding out, some Japanese families had to take out multi-generational home loans… that is to say a home loan that would take multiple generations of family members to pay it off. Some Japanese could not even take over their own house.

As you say, Japan‘s economy has certainly had, and still has, it’s challenges.

 

[undefined]

.

As a youngster I remember being told that the Japanese will take over / buy out the world…

… and then at some stage finding out, some Japanese families had to take out multi-generational home loans… that is to say a home loan that would take multiple generations of family members to pay it off. Some Japanese could not even take over their own house.

As you say, the Japan‘s economy has certainly had, and still has, it’s challenges.

I don't usually like EE's stuff but this was interesting: