Japanese unemployment


In November, Japanese unemployment was at 5.2%.

Many folks are comparing the Fed’s action today to those of the Bank of Japan in the “lost decade” (e.g.). I can’t quite peg down the comparison being made by Sumner, but Yglesias articulated it most clearly:

[Bernanke] knows that unemployment is a problem now and he believes that he could fight it, but that fighting it more aggressively would elevate the risk of inflation in the future and he thinks that reducing the possibility of future inflation is more important than reducing the reality of current unemployment. I think that’s nuts. But it’s an attitude the Bank of Japan has consistently maintained since the 1990s.

Here’s the employment to population ratio:
Its safe to say employment wasn’t a problem in the “lost decade” and there wasn’t too much weight put on inflation relative to unemployment.

5 thoughts on “Japanese unemployment”

  1. A few points:

    1. In the 1990s Japan’s unemployment rate rose to more than twice the normal rate.
    2. Employment to population is strongly affected by demographics. With the sharp fall in the birth rate it should have risen strongly (even with stable unemployment). It was rising strongly until 1991. Then something went wrong.
    3. Japan’s slow secular growth is not due to monetary policy, but rather supply-side problems.
    4. Neverthless, the tight money has caused two problems. First, it has led to extremely wasteful fiscal stimulus, to fix a “problem” (i.e. slow NGDP growth) much more easily addressed through monetary policy. Second, the near zero interest rates resulting from near zero NGDP growth has made conventional monetary policy tools ineffective in recessions. If they want to use interest rates as a tool, they ought to get out of their liquidity trap through higher inflation.

  2. 1. Its true, but unemployment didn’t get above the 1980’s average until the mid-90s.
    2. I agree, but the demographics don’t change as fast as the spikes and dips in the graph.
    3. Agreed. Is the Central Bank’s policy stance (its willingness to claim control over inflation) a supply side problem?
    4. Is slow NGDP growth a problem? Would a benevolent dictator have NGDP in its objective function? NGDP can be a policy target, but I don’t think we should claim success or failure in a non-NGDP targeting regime (i.e. the BoJ or the Fed) using NGDP. Its a bit like saying, things are bad right now BECAUSE interest rates are low. And why would you, of all people, care about interest rate as a policy tool? Why is this a problem that needs fixing?

  3. Yglesias writes, “I think that’s nuts.”

    Well, the Fed has one real policy tool and that is open market operations. My question for him would be how the Fed can simultaneously address these two goals given the one tool. From the context it seems that he thinks that perhaps the Fed should simply adjust the relative weights on inflation and unemployment. Of course, such changes create longer term policy disasters.

    What we need are realistic policy goals. As Milton Friedman wrote early in the Burn era, “A major problem of our time is that people have come to expect policies to produce results that they are incapable of producing.”

    This is why I like NGDP targeting. If you believe that the price system works, this type of policy implies that in the long run GDP will grow at trend and the inflation rate is chosen based on the NGDP target relative to that trend. What’s more, if the central bank can credibly influence expectations, it is likely that we could avoid some of the fluctuations that result from monetary disequilibrium.

  4. If I had to rank targets for monetary policy, they would be as follows:

    1. NGDP
    2. Price level
    3. Inflation

    My problem with price level (and inflation) targeting relative to NGDP targeting is that it treats all movements in the price level as equivalent. A positive shock to aggregate supply should result in a lower price level. What’s more, nominal rigidities should not be a problem is such a case. Higher productivity means that the cost of one unit of output should be declining and therefore firms are able to lower their price — indeed such a decline is optimal. However, following a negative AD shock, the price level should also fall. However, here nominal rigidities are an issue. The firm would rather draw down inventories and reduce production than lower its price.

    In the first scenario, we would not want the Fed to do anything. Output increased and the price level fell — optimally. In the second scenario, output declines first and then the price level. In this case, we would want the Fed to become expansionary to stimulate AD and shift output back to potential and keep the price level constant.

    NGDP targeting does this automatically. An SRAS shock would result in opposite movements in prices and output and NGDP would not be effected (much). An AD shock result in co-movement of output and prices and increases in NGDP relative to trend. Thus, NGDP higher than the target suggests that the Fed should pursue contractionary policy, and lower NGDP requires that the Fed use expansionary policy.

    In the paper that I just sent you I make the case that policy errors in the Great Inflation are captured by movements in NGDP growth. Arthur Burns was convinced that (i) inflation was driven by cost-push forces and thus SRAS shocks, and (ii) monetary policy could stimulate output back toward potential without creating inflation.

    The result is that the Fed misinterpreted AD shocks for SRAS shocks and followed expansionary policy (while urging an incomes policy on the fiscal side) when they should not have done so. This is highlighted in my estimates of the Fed’s reaction function to nominal income growth.

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