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The developments in the Japanese financial markets over the past week has caused a lot of debate about the sustainability of the "Kuroda shock". It is particularly the rise in nominal bond yields, which seems to have shaken some Japanese policy makers.
A key critique of monetary easing in Japan is that Japan's real problem is not monetary, but rather a supply side problem. I strongly agree that the Japanese economy is facing serious structural challenges - particularly an old-age population and a declining labour force. However, I also think that there often is a tendency for commentators to overstate these problems compared to supply side problems in other developed economies.
I have no doubt that Milton Friedman would have congratulated Bank of Japan governor Haruhiko Kuroda on the fact that Japanese bond yields continue to rise.
The Japanese stock market dropped more than 7% on Thursday and even though we are up 3% this morning there is no doubt that “something” had scared investors.
I have been reading the reports on the Japanese trade data for April, which have been published this morning. The reporting is extremely telling about how most journalists (and economists!) fail to understand what is going on in Japan (the markets understand perfectly well - Nikkei is nicely up this morning).
I think there is a bubble in bubble fears. This is particularly the the case for central bankers and institutional monetary institutions.
This is Richard Fisher, President of Federal Reserve Bank of Dallas:
This is from Sky News:
Guest post: Central bankers should watch the Eurovision
I fundamentally think that what really sets Market Monetarism aside from other macroeconomic schools it how we see the monetary transmission mechanism. I this blog post I will try to describe how I think the monetary transmission mechanism would look like in a ‘perfect world’ and how in such a perfect world the central bank basically would do nothing at all and changes in monetary conditions would be nearly 100% determined by market forces.