I was a friend of Mick Jagger at LSE. He didn't study economics, but his father was an accountant, and he was pretty cluey on financial matters. He completed five of nine segments of his degree, and said to me later that he had intended to continue, but the Stones took off so fast at Easter 1963 that he never got the chance.
"As I learned at the conference (Kakuho, Hogen, Otaka, and Sudo 2024), Japan developed a “no price change norm,” in which most businesses do not change prices and customers expect no price changes. Most of the conference discussion thought this a terrible thing, and celebrated the return of inflation to break that norm."
As someone who lives in Japan now (and visited periodically since living there in the early 1990s) I can say that zero inflation made things very very easy for customers and suppliers. Central bankers and economists may like a little inflation but the general public does not.
For suppliers one cost saving that results is that there is no need to reprint price lists. Many restaurants (for example) had menus which were literally decades old and unchanged. Some had the prices for dishes painted on the walls.
For customers the benefit was in budgeting. If you spent X on groceries, say, this month last year you would expect to spend the same this year. And so on. In business this meant you could forecast costs years out without worrying that your suppliers would increase prices and that you would therefore need to do the same.
Compare to, say, France which when I lived there (1999-2013) it was normal for people to increase the price of everything by a bit each year. Train tickets and car tolls would rise. Restaurants would add €0.50 to every dish on the menu and so on. There was always a discussion every year as to whether to raise prices for services and if so, by how much. That applied to everyone from large companies to small one-man gardeners (or one woman housecleaners).
In Japan you could set your price at a nice round number (say JPY 500 or 5000) that gave you a reasonable profit and expect to keep it at that. In France every year you had to think whether you wanted to move from €5 or €50 to €6 or €55 and should you jump from €5 to €6 or just €5.50 ?
First, I am not an economist, but I do very much enjoy the work of such an economist as this paper provides. The various actions and results provide insight and understanding of what is happening at levels far exceeding other types of study, save perhaps factual history.
However neither can provide the future.
My thanks to John Cochrane for showing the history along with the economic facts and theories of what happened and what might happen.
I feel like detractors will say this is cherry picked. But, it's true. Demographics heavily influence economies. The US couldn't help but grow quickly as the baby boom generation matured. The millennials outnumber the baby boomers.
I think government policy has a lot to do with microeconomic inefficiency. Businesses are often far more efficient in lower regulatory regimes.
"No price change norm" means also "no wage change norm". And at the same time govenrment debt is quite high, money agains it is a lot, the currency depreciates against the dollar. I think, Japan does something similar to what Eastern Europe did during the communism - you can generate a lot of electronic money (and debt behind it, this is said in contemporary language), and then you try to controll how much money in the form of cash is in the hands of population. But sooner or later, artificial supressing the wages will crack and you will get significant rise of prices for everyday goods. No, I am not impressed of what Japan did.
Here is something from another work about Japan that seems to me plausible:
"Thus, negative welfare effects of persistently loose monetary policies are shifted to the households via inflation in most industrialized countries, whereas in Japan the transmission channel of the negative welfare effects of strong monetary expansion seems to have been nominal wage repression rather than financial repression."
I am glad that it is not easy Japan's "experience" to be replicated elsewhere.
In many ways, China's economic ascent over the past few decades has mirrored Japan's experience as Prof. Cochrane described above, albeit on a more explosive scale. Since embarking on its marketisation and privatisation reforms in the late 1970s, China has witnessed perhaps the most dramatic and geographically expansive economic catch-up in contemporary history. By unleashing the productive potential of its urban and vast rural populations through economic reforms and integrating into global supply chains, China rapidly narrowed the income gap with advanced economies. From 1978 to 2022, its GDP per capita soared from just 1.2% to around 18.4% of US levels at constant US dollars, according to World Bank data.
However, there are growing signs that China's catch-up phase may be losing steam. In addition to the woes of a declining working-age population, China's productivity growth has slowed markedly in recent years. Total factor productivity growth's contribution to China's real GDP growth has declined from over 4% in the mid-2000s to around 2.5% recently. Economists predict it may drop further to an average of 1.3% over the next 10-15 years, potentially limiting China's economic growth rate (Peschel & Liu, 2022).
Amid the sputtering economic momentum, a chorus of voices has urged more aggressive fiscal and monetary stimulus measures in China. The argument is familiar - inadequate demand lies at the heart of China's woes, requiring proactive government spending and easier credit to rekindle the engines of economic activity. However, this Keynesian diagnosis may be misguided. What if, like Japan before, China's slowdown stems not from insufficient demand but from deeper microeconomic forces that defy simplistic stimulus remedies?
A comment about the bubble issue using the numbers and model you propose as I don't think they are consistent with the stock market movement we obeserved:
If as you said Japan got to 16% below frontier GDP per capita in 1991 and you assume Gl to be 2%, to get to frontier reasonable numbers are Gh=4% and, given that in 9 years Japan would reach frontier, a lambda of at least 15% (which might be conservative as it still gives a 20% chance of Japan outperforming frontier at year 10). Using an r of 4% as you do gives a PCh/PCl ratio of about 113%, so the stock market should fall much less than the about 50% fall obeserved from beggining 1990 to mid 1992. So it does kinda look like there was some bubble component (at least using this simple explanation)?
I was a friend of Mick Jagger at LSE. He didn't study economics, but his father was an accountant, and he was pretty cluey on financial matters. He completed five of nine segments of his degree, and said to me later that he had intended to continue, but the Stones took off so fast at Easter 1963 that he never got the chance.
"As I learned at the conference (Kakuho, Hogen, Otaka, and Sudo 2024), Japan developed a “no price change norm,” in which most businesses do not change prices and customers expect no price changes. Most of the conference discussion thought this a terrible thing, and celebrated the return of inflation to break that norm."
As someone who lives in Japan now (and visited periodically since living there in the early 1990s) I can say that zero inflation made things very very easy for customers and suppliers. Central bankers and economists may like a little inflation but the general public does not.
For suppliers one cost saving that results is that there is no need to reprint price lists. Many restaurants (for example) had menus which were literally decades old and unchanged. Some had the prices for dishes painted on the walls.
For customers the benefit was in budgeting. If you spent X on groceries, say, this month last year you would expect to spend the same this year. And so on. In business this meant you could forecast costs years out without worrying that your suppliers would increase prices and that you would therefore need to do the same.
Compare to, say, France which when I lived there (1999-2013) it was normal for people to increase the price of everything by a bit each year. Train tickets and car tolls would rise. Restaurants would add €0.50 to every dish on the menu and so on. There was always a discussion every year as to whether to raise prices for services and if so, by how much. That applied to everyone from large companies to small one-man gardeners (or one woman housecleaners).
In Japan you could set your price at a nice round number (say JPY 500 or 5000) that gave you a reasonable profit and expect to keep it at that. In France every year you had to think whether you wanted to move from €5 or €50 to €6 or €55 and should you jump from €5 to €6 or just €5.50 ?
First, I am not an economist, but I do very much enjoy the work of such an economist as this paper provides. The various actions and results provide insight and understanding of what is happening at levels far exceeding other types of study, save perhaps factual history.
However neither can provide the future.
My thanks to John Cochrane for showing the history along with the economic facts and theories of what happened and what might happen.
I look forward to the future.
GDP per working age person!
This is the most important metric that should be most often quoted, and measured, and most discussed by most economists.
Fertility is an important aspect of it, so the worker/dependent ratio is also an important metric, so far not mentioned here.
“Microeconomic inefficiency” seems an excellent term to describe the important differences for actually having businesses adapt to changes.
More parts coming, oh my! The huge Japanese debt discussion likely coming.
I feel like detractors will say this is cherry picked. But, it's true. Demographics heavily influence economies. The US couldn't help but grow quickly as the baby boom generation matured. The millennials outnumber the baby boomers.
I think government policy has a lot to do with microeconomic inefficiency. Businesses are often far more efficient in lower regulatory regimes.
"No price change norm" means also "no wage change norm". And at the same time govenrment debt is quite high, money agains it is a lot, the currency depreciates against the dollar. I think, Japan does something similar to what Eastern Europe did during the communism - you can generate a lot of electronic money (and debt behind it, this is said in contemporary language), and then you try to controll how much money in the form of cash is in the hands of population. But sooner or later, artificial supressing the wages will crack and you will get significant rise of prices for everyday goods. No, I am not impressed of what Japan did.
"And monetary policy certainly cannot induce people to have babies!"
Printing money is easier than printing people. :-) Fiscal and monetary policies together "contribute" to the demography problem.
Here is something from another work about Japan that seems to me plausible:
"Thus, negative welfare effects of persistently loose monetary policies are shifted to the households via inflation in most industrialized countries, whereas in Japan the transmission channel of the negative welfare effects of strong monetary expansion seems to have been nominal wage repression rather than financial repression."
I am glad that it is not easy Japan's "experience" to be replicated elsewhere.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4154090
In many ways, China's economic ascent over the past few decades has mirrored Japan's experience as Prof. Cochrane described above, albeit on a more explosive scale. Since embarking on its marketisation and privatisation reforms in the late 1970s, China has witnessed perhaps the most dramatic and geographically expansive economic catch-up in contemporary history. By unleashing the productive potential of its urban and vast rural populations through economic reforms and integrating into global supply chains, China rapidly narrowed the income gap with advanced economies. From 1978 to 2022, its GDP per capita soared from just 1.2% to around 18.4% of US levels at constant US dollars, according to World Bank data.
However, there are growing signs that China's catch-up phase may be losing steam. In addition to the woes of a declining working-age population, China's productivity growth has slowed markedly in recent years. Total factor productivity growth's contribution to China's real GDP growth has declined from over 4% in the mid-2000s to around 2.5% recently. Economists predict it may drop further to an average of 1.3% over the next 10-15 years, potentially limiting China's economic growth rate (Peschel & Liu, 2022).
Amid the sputtering economic momentum, a chorus of voices has urged more aggressive fiscal and monetary stimulus measures in China. The argument is familiar - inadequate demand lies at the heart of China's woes, requiring proactive government spending and easier credit to rekindle the engines of economic activity. However, this Keynesian diagnosis may be misguided. What if, like Japan before, China's slowdown stems not from insufficient demand but from deeper microeconomic forces that defy simplistic stimulus remedies?
A comment about the bubble issue using the numbers and model you propose as I don't think they are consistent with the stock market movement we obeserved:
If as you said Japan got to 16% below frontier GDP per capita in 1991 and you assume Gl to be 2%, to get to frontier reasonable numbers are Gh=4% and, given that in 9 years Japan would reach frontier, a lambda of at least 15% (which might be conservative as it still gives a 20% chance of Japan outperforming frontier at year 10). Using an r of 4% as you do gives a PCh/PCl ratio of about 113%, so the stock market should fall much less than the about 50% fall obeserved from beggining 1990 to mid 1992. So it does kinda look like there was some bubble component (at least using this simple explanation)?