19 Mar 2011

Two Questions on Japan

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This Bloomberg story says the G7 countries’ central banks intervened to weaken Japan’s currency. But what exactly did they do? If the BOJ wants to make the yen fall against the dollar, euro, etc., why doesn’t the BOJ just print more yen and buy more dollars, euros, etc.? I don’t understand what the other G7 banks had to do. If anything, to make it more effective, the BOJ should have told them, “You guys stay out of the currency markets, we are going to start buying your stuff and we don’t want you offsetting our actions.”

More generally, I have been trying to get the death-blow to Scott Sumner’s worldview by looking at economies following natural disasters. I had thought that they would show a drop in nominal GDP, and then I could say, “Aha! So using Sumner’s tools, he would look at these places and conclude that they needed to print more money, since it clearly wasn’t a structural supply-side problem.”

The only flaw in my brilliant plan was that (apparently) the nominal GDP of Haiti went way up after the earthquake, and even the Gross State Product of Louisiana went up after Katrina. So either I’m totally wrong in my intuition–thinking that real output drops so much following a major natural disaster, that even nominal GDP falls–or the influx of charity and the flaws in GDP accounting are masking my brilliance.

Anyway, I would love to see a Scott Sumner prediction on what happens with Japanese nominal/real GDP…

10 Responses to “Two Questions on Japan”

  1. noiselull says:

    Read “Are Crises Good for the Economy?” at libertyunbound.com. Amazing insight.

  2. Daniel Kuehn says:

    “or the influx of charity and the flaws in GDP accounting are masking my brilliance.”

    Nonsense – nothing could mask your brilliance, Bob!

    On your other question – what is it exactly that the G7 are doing… I’m drunker than I have been for years right now, but the answer still seems pretty obvious to me – sell yen? What else could they be refering to?

  3. Daniel Kuehn says:

    I do want to congratulate you, by the way, on being one of the few people who expected a decline in output following a disaster that did not lower himself to the level of accusing those who felt differently of not caring about the welfare of the Japanese. It’s pretty sickening to read what some people are writing – slandering those who simply note that rebuilding can put people to work in an economy with slack.

    It seems to me enough productive capacity is destroyed in Japan that this silver lining is probably a pipe dream – at least in this particular case. But noting objectively the possibility of such an impact on output doesn’t deserve the sort of censure it’s been receiving.

    • Avram says:

      I don’t get it. You can’t just say “yeah this disaster was pretty bad but at least it gives these people something to do, they were getting pretty bored” It doesn’t mean you hate the japanese if you say it but you still can’t say it cause it doesn’t make sense.

      I don’t think an economy can ever have the problem of “we’re just out of things to do”, and if it did whats to stop people from say just bulldozing their houses and building a new one when it gets dirty.

      Maybe you could justify such a statement on some sort of psychological narrative like saying people previously apathetic to the ways of the world have now just been spurred on to innovate and create new things, the tsunami sweeping their spirits upward as it had swept away their houses. But thats not the world’s most convincing argument.

    • Ashley Johnston says:

      Why does lowering the integrity of infrastructure supposedly have a stimulating effect that is not present from simply having low integrity infrastructure to start with? Seems to reflect some loss aversion bias. I mean, what would happen if you replaced all the Haitians with 10M Japanese pre-quake(s).

      Or there could be some sort of artificial centralization since all the people are rebuilding with the same vision. As opposed to the competing visions that are present when normally growing an economy.

  4. Robert Wenzel says:


    I think you raise an imprtant point here, The only reason to do it the way the central banks are doing it is to create a bit of hocus pocus smoke to hide the fact that the only thing going on is BOJ money printing.

  5. WT? says:

    Can someone answer me this? I’ve read that the yen has gone up in value because of the disasters, but why should it go up? I’ve never really understood how currency prices work.

    • Jon O. says:

      1) Repatriation of funds (ex. insurance companies who need to payout claims in jpy)

      2) crisis = selling of risk assets = unwinding carry trades funded by jpy = buying jpy

      3) speculators anticipating #1 and #2

  6. Avram says:

    If they hold any yen selling them at an agressive price should help weaken the currency quite effectively.

  7. Scott Sumner says:

    Robert, My hunch is that both RGDP and NGDP will tend to fall for a quarter or two, then rise. That’s partly because GDP inflation in Japan is near zero, so the two tend to move in lockstep. Other experts are predicting a brief decline in RGDP, and I certainly don’t know more than they do about all the logistical problems in Japan. (Recent reports suggest the worst case for the nuke will be avoided. Knock on wood.)