Sumner, the Japanese Recovery, and NGDP vs. RGDP

     Sumner has a piece today about the latest Japanese numbers which look impressive indeed. Perhaps they are recovering-not just from 2008 but from their 20 year stagnation. On the other hand it's not exactly the way Market Monetarism says things should happen either.

     "Japan’s new GDP numbers look a bit puzzling:

Japan’s economy expanded the most in a year last quarter as consumer spending and export gains outweighed the weakest business investment since the wake of the March 2011 earthquake and tsunami.

Gross domestic product rose an annualized 3.5 percent, a Cabinet Office release showed in Tokyo. Private consumption, making up 60 percent of GDP, contributed 2.3 percentage points to the jump. The Bank of Japan may upgrade its assessment of the economy after a May 22 policy meeting, according to people familiar with the central bank’s discussions.

. . .

Annualized real growth exceeded all but two of 36 estimates in aBloomberg News survey. Nominal GDP, which is unadjusted for changes in prices, rose 1.5 percent, also the most in a year. The nominal gain was 0.4 percent from the previous three months, less than the median forecast for a 0.5 percent increase. 

     "On the plus side, it certainly supports my claim that faster NGDP growth in Japan would not merely lead to equally higher inflation.  But as Matt Yglesias correctly points out, it’s almost too good for the demand-side framework.  Faster nominal growth should boost both RGDP and inflation."

    http://www.themoneyillusion.com/?p=21206

    I'm not exactly sure what this supports but it's very intriguing. I agree with Sumner that it does lend some support for Abenomics. Still, it also brings me back to a thing I've wondered about for awhile: the distinction between RGDP and NGDP and what is the validity of Sumner's move from the former to the latter?

   He often carps at Keynesians as being too besotted with RGDP; he insists this is not the best gauge. Yet, the commentator Greg, for one, argues that GDP is already in some sense nominal. This confuses me. I guess what happens is that we get NGDP before RGDP, as RGDP is gotten after taking inflation out-the price deflator-of total spending.

   What do these latest Japanese numbers say about RGDP vs. NGDP as the best gauge?

    For Abenomics as well, the implication is mixed however. Sumner doesn't think it can maintain 3.5% RGDP in the long term. Yglesias has some very interesting thoughts:

    "Fans of Japanese monetary policy got some odd news during the non-business hours in the eastern time zone. Japan's new GDP data appears to show a triumph of Abenomics with real GDP growing at an annualized rate of 3.5 percent in the first quarter."

     "That would be the fastest growth rate in the G7 and it's particularly impressive because Japan's slow population growth and declining working age population should lead us to believe that it has a very sluggish underlying potential growth rate. So that's a huge win for Shinzo Abe and Abenomics."

     "On the other hand, the GDP Deflator (the broadest possible measure of inflation) fell. In fact, it fell by quite a lot. A surge in real growth paired with a falling rate of inflation is what you would expect to result from a policy of highly effective structural reforms—exactly what Abe stands accused of neglecting in favor of stimulus. At the same time, since the key mechanism of Abenomics was supposed to be breaking the cycle of deflationary expectations this makes Abenomics look ineffective."

    "And yet the mystery deepens, because when you look at the components of growth—exports followed by residential investment followed by consumer spending with non-residential business investment still weak—that very much looks like a successful program of monetary stimulus rather than a positive supply shock."

     http://www.slate.com/blogs/moneybox/2013/05/16/abenomics_mystery_is_it_working_or_not.html

     Still, as Yglesias says, while there are some curiosities and some questions are begged, it's overall got to be a win for Abe; the goal is growth not inflation. 

      "All in all, I think you'd have to consider this a win for Abenomics. The goal, after all, is to produce real growth not to produce inflation. If you get the growth, you're winning. But it is a puzzling scenario and it least raises the possibility that all the good news from Japan over the past six months has been some kind of giant coincidence totally unrelated to the policy experiments taking place. On the other hand, it always strikes me that people who are skeptical of central banks' ability to raise inflation expectations taking a bizarrely narrow view of the consequences of that. If it's really true that the Bank of Japan can print all the money and buy all the assets it likes without causing inflation, then that shouldn't just lead to pessimism about monetary stimulus it should lead to a policy revolution. Why is Japan bothering with taxes if large-scale money-printing is non-inflationary? Huge money-financed tax cuts would operate as simultaneous fiscal stimulus and supply-side reform, and if they can be enacted without any impact on the price level then why not do it? And I mean that quite genuinely. Since debate seems polarized between those who want increased inflation in Japan and those who doubt that increased inflation is possible, it seems like a no-brainer to finance the government with money-creation rather than taxes."

      That last point is particularly thought provoking. Any one got any thoughts? 

      P.S. I'm just glad to talk about something interesting and intelligent rather than the vapid Beltway obsession with pseudo scandals for a moment. 

      P.S.S. Abe certainly has to prefer his problem though to the EU's which is still in recession.