Kazumasa Iwata: The Current State of the Japanese Economy

I have been pretty preoccupied as of late with Japan and as such I thought I would also share with you a recent speech by Deputy governor of the Bank of Japan Kazumasa Iwata on the immediate outlook of the Japanese economy and monetary policy. As you can see he is much more optimistic on the rebound of inflation and consumer spending than I am. Moreover the speech also gives a valuable insight into the policy setting process within the BOJ. Here is an excerpt from mr. Iwata's remarks on consumer prices ...

The year-on-year rate of change in the CPI (excluding fresh food) was flat in January, and depending on developments in crude oil prices and foreign exchange rates, it may turn slightly negative in the short term. From a longer-term perspective, however, consumer prices are expected, over time, to display trend increases given that the economy has expanded at an annual rate of around 2 percent over the last four years and that the expansion is expected to be long-lasting. With the continuing economic expansion, the utilization rates of production capacity and of labor have been rising steadily, and they are expected to increase further. As the recent Tankan (Short-Term Economic Survey of Enterprises in Japan) indicates, corporate managers are increasingly feeling shortages of production capacity and labor, while a positive output gap suggests that demand currently exceeds supply in the economy as a whole. 

Note, especially the idea of a positive output gap and how demand exceeds supply in the economy. Methinks that someone is not taking into account the nature of Japanese growth and the relationship between domestic capex and foreign capacity. In short; how do we measure output gaps adequately in an ageing economy such as Japan's or more specifically ... how does ageing affects the operationalization of output gaps? In terms of output gaps Mark Thoma recently pointed to an article from the Dallas Fed by Mark A. Wynne and Genevieve R. Solomon. The article is an excellent intro to the economic operationalization and measurement of output gaps. Of course I have my mandatory adjustments in order to better take into account the fundamentals of ageing but all in all still a very readable article.

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