Episode 203 – Japan: A Case Study in MMT with Bill Mitchell

**After the episode, visit our “Extras” page where you’ll find links to Bill Mitchell’s blog, books, MMT education course, and more. Every episode of this podcast is also accompanied by a full transcript. realprogressives.org/macro-n-cheese-podcast/** 

Usually when Steve and his guests talk about culture, they’re referring to that of neoliberalism. As Scott Ferguson says, neoliberalism isn’t just enmeshed in our popular and esthetic culture; it is our culture. “There’s no enmeshing; it IS neoliberalism—what in the Marxist tradition we call etiology, the kind of background assumptions and values that structure our innermost thoughts and feelings and desires and, you know, what makes us laugh, what makes us cry, what makes us horny. What makes us, you know… everything.”  

In today’s episode, our dear friend, Bill Mitchell, talks to Steve about Japanese culture, which predates neoliberal culture by eons. Bill has recently taken a fellowship at Kyoto University, giving him and his wife the opportunity to experience the day-to-day life of Japanese society while pursuing his research into their economy.  

Bill’s interest in Japan coincides with the start of his academic career: 

“As I was entering my first tenured position, Japan had the biggest commercial property collapse in history. It went neoliberal in the late 1980s and had an extraordinary explosion of debt, typically concentrated on commercial property in Tokyo and Nagoya and the big cities. And that collapsed in 1991.” 

Despite the huge decline in property values, Japan had just one negative quarter of GDP. He had to ask, “How the hell have they been able to avoid a deep recession and get out of this huge property market collapse?” The answer was found in the government’s response—providing fiscal support to the economy. 

“The fiscal deficits went up to 10% or 11% of GDP. And in historical terms, that was huge; that was sort of like wartime shifts in fiscal positions. So that’s what started me on my Japanese research agenda and my interest in following Japan. Then I met Warren (Mosler) and we started the MMT project in the mid-90s… And Japan was my laboratory—my real-world laboratory.” 

Some suggest that the government’s fiscal behavior could be explained by the difference in culture. But the way the monetary system works is identical to that of the US or Australia. 

Throughout the episode, Bill and Steve continue to compare Japanese culture and economic policies with those of their home countries.   

We at Macro N Cheese are always looking for answers, but often the learning experience is more valuable when we come away with new questions. Throughout this episode, Bill and Steve compare Japan’s culture and economic policies with those of their home countries, yet they make no definitive statements about cause and effect. 

Japan has managed to maintain a high standard of living for its citizens—first-class health care, first-class public education, first-class public transport. Unlike the US, Japan does not see unemployment as the cure for inflation. Bill describes the many service workers in jobs that would make neoliberal bean counters pull out their hair—greeters in stores, parking guides, maintenance workers in Japan’s beautiful public spaces. These jobs are not busy work; they improve a community’s quality of life. Bill sees Japan as an ideal candidate for a job guarantee.  

Japan faces vast challenges, yet its monetary and fiscal policies continue to defy the pressured expectations of hedge fund speculators, austerity evangelists and self-styled experts (hello, Paul Krugman!) This demonstrates that mainstream macroeconomics is not knowledge, it is fiction.  Only MMT has it right. 

Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. 

@billy_blog on Twitter 

Macro N Cheese – Episode 203
Japan: A Case Study in MMT with Bill Mitchell
December 17, 2022

[00:00:03.410] – Bill Mitchell [intro/music]

I couldn’t believe how many universities there are in Kyoto. And this is their commitment that the biggest investment a nation can make in its people is to educate them and to develop skills and sophisticated understandings of the world and not try to cut money out of education or privatize it.

[00:00:26.330] – Bill Mitchell [intro/music]

If your predictions are consistently wrong, then the body of theory has to be wrong. You can’t have it both ways. And I think Japan demonstrates that mainstream macroeconomics is not knowledge, it’s a fiction.

[00:01:35.150] – Geoff Ginter [intro/music]

Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43.140] – Steve Grumbine

All right. This is Steve with Macro N Cheese. My friend Bill Mitchell joins me today from Melbourne. He has recently been in Japan, and Japan is a case study for Modern Monetary Theory. Bill has written extensively about this for years, and now he’s been working in Japan and getting a frontline seat at what’s happening there.

So I figured, what better time than now to bring in Bill to debunk some of the insanity that is going on in the world right now and also show us what it looks like when a country has a collectivist vision for itself and is willing to do what it takes to make life good for all. And with that, Bill Mitchell. Welcome to the show, sir.

[00:02:30.870] – Bill Mitchell

Thank you very much. Pleased to be here.

[00:02:34.080] – Grumbine

Of course, it’s been a while, and I’m glad to have you on. So you just recently came back from Japan. Tell us, what were you doing in Japan? How did this all come to be?

[00:02:47.190] – Mitchell

Well, I’ve had a long-term research interest in Japan and interacted over many years with people in academic life in Japan and to some extent in the policy space. In 2019, I went there on an invitation and spoke in the Parliament, the Diet, and met a lot of researchers on all sides of the debate. Really, it was very interesting. And then I was asked whether I would be willing to take a position at Kyoto University.

The Japanese have an international fellowship plan. It’s a national scheme, and they bring a handful of international scholars each year. So I said, yeah, I’d be open to that. And this was in 2020. I was offered one of those invitational fellowships to work with a group at Kyoto University and, of course, Covid came along, so nothing happened.

And the funding agency kept rolling over the funding, which was really good. And so now we considered it was safer to travel. And the Japanese government made some allowances at that stage to provide selective visas to people with those sort of reasons for traveling. And so I took up the fellowship at Kyoto University and have been working in a very interesting research center, and that now will be an ongoing arrangement with the university, which I’m very happy with.

So I’ll be able to go back next year and years to follow. And we’ve now got a very active research program that brings my macroeconomic skills to the party with a whole lot of other groups—engineers, urban planners, health experts, lawyers, all sorts of different skills in a very pluralistic way. And the center I’m working in is 100% MMT compliant, if you like.

They all understand MMT. They use it as their main framework for understanding the questions that MMT relates to, which are relevant to most things. But of course, they don’t have context unless you’ve got all these other skills—transport planners, infrastructure engineers, and all of these other skills that cooperate together to build, really, and to come up with really innovative solutions to the challenges that Japan is now facing.

So that’s how it came about. I’ve now got this ongoing relationship with the university and with the researchers there, and the network is right across Japan. I’m working with people in Tokyo and Osaka and Fukuoka and all the major cities with their universities. So it’s a really interesting opportunity and a really interesting future.

[00:06:05.110] – Grumbine

When we were talking before we started this, one of the things that really jumped out at me is that Japanese society is built for collectivism. And I live in the United States, where it’s all about individualism. It’s quite a lonely, alienating experience, but the idea of a collectivist approach to society, that has got to be an incredible experience.

But when you consider the power of the lens of modern monetary theory with the sensibilities of collectivism, I can only imagine the opportunity to change and thrive in that space. Tell me a little bit about the collective nature of Japan and how that might play into your work.

[00:07:00.470] – Mitchell

Well, it’s a very different society to, say, American society and Australian society, and you sense that straight away, even if you don’t understand it yet when you go there and start working and living. A really good thing for us was that we lived in just a regular neighborhood and shopped at the local little shops, and so we just were interacting with the regular people, and I avoided the tourist areas at all costs.

And it’s really interesting living in a neighborhood, because you start to feel, even if you haven’t yet understood it, you start to feel that people have a real sense of where they stand with other people and care for other people, a concern. And so we lived there for several months, and when you start living there and learning more and more, you learn that young children are brought up with great respect to really care about their impact upon the other people around them.

And that shows up in all sorts of ways. So one of the stark things as soon as you get off the plane is that everybody is currently wearing masks. Now, if you get off the plane in Sydney, which I did this week, hardly anybody is wearing a mask. Now, even if you didn’t believe in the effectiveness of mask wearing at the moment during a global pandemic, even if you didn’t believe in the effectiveness, in Japan, they would still wear the mask out of respect.

Now, I believe in the effectiveness of them, but even if I didn’t, I would have been under an implicit pressure to put on my mask. And every day out in the street, everywhere, you wear a mask. And that’s a collective thing, a respect for your impact upon other people around you. And you get off the plane in Sydney, nobody’s got a mask on.

There’s no sense of we’ll wear this little bit of inconvenience just to minimize or to reduce our impact upon other people. So that’s a really significant difference in just daily shopping. You go to the local bakery and there’s great respect shown. People bow to you and you bow back. And there’s a number of things you say to them that shows that you respect them.

And an individualist might say, well, that’s trivial. But it’s not trivial because, as I say, it shows up in the way they behave at the national level. Now, then you go down to the tourist level areas in Japan and who’s not wearing masks? All the American tourists. An American came to visit me while we were living there and I said to them, you know, you got to be wearing a mask every day.

And they said to me, Why? And I said, “Because you’re in their country. And that’s a form of respect.” That’s a collective respect. So that’s taught to children from an early age and it shows up in the care that they show for you in the society. Now, there’s tensions with all of that because there’s also Western influence, an English-speaking Western influence, and there’s a strong American influence coming into Japan all the time.

And so there’s groups of people within the education system—younger teachers, typically maybe some who have been educated in the United States and they’re trying to break down that system and argue that you shouldn’t be passive. You should be aggressive and individualistic and take your place in the world and define your space and defend it and all of that sort of individualism, which really breeds into neoliberal-type philosophies.

So there’s that tension going on and a lot of the traditional Japanese culture is under pressure, there’s no doubt about it. Now, the way that collective pans out at the national level: so, at the moment, you’ve got the Western English-speaking world and European countries pushing up interest rates, buying into this “inflation’s a terrible problem. We’ve got to create unemployment to stop it.”

And all of the stuff that’s going on now in national economic policies, which are really a massive redistributional shift going on at the moment where the interest rate rise is, channeling cash away from and income and wealth away from low income mortgage holders to high income wealth holders whose wealth benefits when interest rates are higher.

And you’ve not only got that, but you’ve also got these massive payments going to commercial banks because there’s excess reserves in the system at the moment as a consequence of the quantitative easing that had been going on during the Pandemic. And central banks are paying commercial banks massive amounts of money, trillions of dollars floating around going to bank shareholders.

So in the west, the English-speaking Western European countries, we’ve just laid down and accepted that there’s going to be this massive redistribution to the wealthy and a lot of low income families are going to lose their houses if interest rates go up much more. And we’ve just said, okay, we’ve accepted this whole inflation myth and the fiscal policy has to be rather tight at the moment, all of those things.

Now, Japan hasn’t done any of that. They’ve held their interest rates at just under zero. They’ve maintained yield curve control over government bond yields and they just announced a couple of weeks ago another fiscal stimulus. And they’re putting pressure on business firms not to put prices up. And they’re providing subsidies to households to help them with the higher imported energy costs.

And their inflation is much lower because the business firms are under pressure not to profit-gouge, and someone said to me the other day in Kyoto that it really hurts us if we create unemployment. The employer really hates to sack a worker in Japan. And so that sort of collective philosophy is showing up in practical ways in the way they conduct their economic policy. And they import almost everything there.

So you can’t say that they’re insulated from all of this current global energy problems and the shortages of materials and supply goods and services as a consequence of the Pandemic. Of course they are, but they’ve just approached it in a collective way and they realize that the challenges they face are not that they’re going to run out of money or that the bond markets can destroy the solvency of the government.

They understand that they’ve got huge challenges with respect to a pending massive earthquake. They need to have decentralization strategies because their cities are too concentrated and they’ll be extremely damaged if, say, for example, an earthquake hits Tokyo. And they understand to have a decentralization strategy, they’re going to have to create better public transport in the regional areas to induce people to move there.

They understand that the housing stock that was built in the post war recovery period is now, in many ways, reached its used-by date and needs to be replaced. And so that’s going to need massive public investment. They understand that they are heavily dependent upon gas for heating and cooking. And with climate change, they’re going to have to electrify more through the neighborhoods.

They understand that the little old wooden houses, which are very well-designed to resist earthquakes, are also very difficult to reverse-engineer to become energy efficient. The walls are too thin to build insulation within the walls, for example. And so they’re trying to work out ways in which they can wrap houses up in blankets, if you like. So external insulation rather than the way we do it, say, in Australia, by putting batts in the walls.

And so these are real challenges, and their population is quite old, and they’ve got to work out how to deal with an aging workforce and all of that. So their approach is to concentrate on trying to advance policy and spending in those areas rather than the way we’re doing it is to undermine our future in the English-speaking West, particularly by running these austerity programs, et cetera.

[00:16:36.270] – Grumbine

Everything you just said feels so foreign to me. In the US, we’re trapped. I almost feel like a prisoner. And the idea of freedom in this country feels like a totally lost cause. And Japan is an island nation. It’s a mountainous island nation, and they’re able to provide a better living standard for all the people there. Compared to what we have in the United States, it feels radically different, not just culturally, but it’s almost impossible to fathom that a country could take care of its own citizens, that could have planned without being draconian and trying to find ways to lay people off.

This is so fundamental in understanding the power of the lens of MMT. And we often talk about “MMT reveals the heart.” And there’s no way in the world that Japan has more, quote unquote, “real resources” available to it than the United States. I don’t know how they determine whether it’s the richest country in the world or not, but it doesn’t do anything for its citizens. We are left as individuals fighting to survive, Bill.

It’s such a horrible culture and it feels hopeless, and it breeds internal alienation, and you look for some sort of pathway out. And MMT had always provided me with a lens. But many of the people here are political opportunists. They don’t hold to the things they know, and they support and elevate neoliberalism, and it’s like a bad nightmare. What is the social fabric of Japan? What is the living standard? What can you expect in Japan that you can’t expect in the United States?

[00:18:37.110] – Mitchell

Well, first-class health care, for a start. First-class public education, first-class public transport. Look, if you speak to the Japanese, they complain all the time about their government. And I just sort of look and say, God! See, Australia’s sort of betwixt because we’ve been able to avoid the full-,scale american cultural onslaught, but we’re some way down that road.

There’s still a sense of public in Australia, whereas when I go to America, I don’t sense that. And someone told me a long time ago, the reason that people go and shoot up post offices in America is because that’s really the only public face of government that they can find. Whereas in Australia, there’s a lot of public face of government.

We are much more of a mixed society here, I think. But in Japan, the standard of living, in my view, is very high. The houses are very small, typically, because there’s not much land which you can build on relative to the land area because it’s just spine and mountains down and forest. The houses are very small. So by Australian standards, three or four Japanese houses into one average Australian house.

And American houses are typically bigger than Australian houses. And they don’t have big gardens. They have public spaces. So we live by the Kamo River, which is a big river that runs down the east side of Kyoto that has the most beautiful areas. A lot of areas along that river bank were set aside through the city as evacuation areas in the case of an earthquake.

But day to day, they are spaces where people play soccer, all sorts of ball games. They’ve practiced big dancing routines. A lot of musicians go down there and rehearse; tubas and violins and guitars and trumpets, and it’s just massive public activity down on the river. One of the most wondrous things around. You can run along kilometers, as I did, and walk and ride your bike.

So my view is that their houses are small, but their access to public services is very good. When you get older, you get great access to medicine, really low cost, and free health care. The public education system is fantastic. I couldn’t believe how many universities there are in Kyoto. And this is their commitment that the biggest investment a nation can make in its people is to educate them and to develop skills and sophisticated understandings of the world and not try to cut money out of education or privatize it.

Their commitment to primary, secondary and childcare after-school childcare, because they work long hours, is second to none. It’s an amazing education system. Now, a person from the west would say, oh, yeah, but all of that collectiveness, they don’t have freedom. And it’s quite true that Japanese society has a number of hierarchies that, say in America, you wouldn’t recognize, and the language itself.

As you start to learn to speak Japanese, in English, there’s only one personal pronoun, “I.” I did this, I did that. And that doesn’t vary with context or who you’re talking to or what the situation is. In Japan, there’s 15 or so personal pronouns, and the one that you use depends upon the context; who you’re talking to, what situation you’re in, whether you’re talking to males or females, family, your wife, your husband, your boss or your colleagues on equal footing.

So there’s all these hierarchies, and it makes learning Japanese hard, by the way, because you don’t want to appear rude, but for us, we would think of that as a tyranny, but to me it’s a solidarity thing that keeps society functioning. And so, yeah, you could see that as being highly restrictive and constraining, that you’re bowing down to people all the time or you’re watching what words you say, depending who it is. But I think that’s just part of the overall collective picture of looking after each other. And I didn’t mind that at all.

[00:23:38.390] – Grumbine

The idea of not worrying about health care, just that alone is an unbelievable concept to me. I find myself in a socialist mindset, and in Japan, the folks have everything they need in terms of access and their health, that type of arrangement. From a hierarchical standpoint, we have a hugely hierarchical society in this country. It’s just masked with this fake word, freedom, but all the benefits. It sounds to me like they at least want to make sure that everyone was taken care of.

[00:24:23.510] – Mitchell

The hierarchy in America is about money and wealth and it’s not embedded within a deep history and a deep culture. Someone said to me the other day, Bill, the dominant hierarchy is based upon age in Japan. And he said to me that even when you’re at primary school, the children the year ahead of you, you have more respect for them, you treat them differently.

And he said that that carries on through your whole life, even when you become an adult, that you meet someone who was one year ahead of you in school and you’ll still see them as older than you. So there’s all those sort of cultural hierarchies. Now, I looked at some of those things and as I understood more of it, I thought, well, you could probably dispense with that and no one would be worse off. But I don’t want to push that line because that’s an English-centric view.

[00:25:27.270] – Grumbine

Sure.

[00:25:28.070] – Mitchell

And you don’t fully understand it anyway when you’re just living for a short while. But in America, it’s much cruder. It’s just money. And money buys lobbying, money buys influence, and politicians are corrupt and they accept influence. And that’s how you get hierarchy and exclusion in the US. The thing about Japan is, as I think you implied, that if you’re just an ordinary citizen, you’ll be able to go to hospital, you’ll be able to get your teeth fixed.

Your child will be able to go to school, and, depending upon their propensities, will be able to go through to university, if that’s their bent, academic bent, really. No matter who you are. And to some extent that’s the same in Australia, but not as much as Japan. It’s certainly not the case, as I understand it, in the US.

[00:26:29.450] – Grumbine

No, not at all. I appreciate this cultural perspective because it helps me better understand economics. People are economics, real resources are economics. Economics is not really the pieces of paper, the digits. It really is about the people and the real resources and what constitutes the mindset and the framework by which people approach problems is very much a cultural thing.

And so the lens of MMT doesn’t really care what culture you’re from, doesn’t really care what your sensibilities are, but your sensibilities will definitely play a role in how you structure the economics. Let’s do an MMT perspective on Japan. Help me understand Japan through an MMT lens.

[00:27:21.870] – Mitchell

Well, I started studying Japan as a young academic because as I was entering my first tenured positions, Japan had the biggest commercial property collapse in history. It went neoliberal in the late 1980s and had an extraordinary explosion of debt, typically concentrated on commercial property in Tokyo and Nagoya and the big cities. And that collapsed in 1991. That caught my interest.

I’d always been interested in Japan, by the way, because of the Second World War experience with my parents. But that caught my interest in ’91. And what I learned was that they had only one negative quarter of GDP. Properties didn’t just fall by a few percent, they fell by tens of percents. Major realignment in property values.

And as a young academic I was saying, well, how the hell have they been able to avoid a deep recession and get out of this huge property market collapse? Because in Australia there would be a huge recession. And the reason I started to understand was that there was a way in which the government responded to that, to provide fiscal support to the economy. The fiscal deficits went up to 10% or 11% of GDP.

And in a historical term, that was huge, that was sort of like wartime shifts in fiscal positions. So that’s what started me on my Japanese research agenda and my interest in following Japan. Then I met Warren [Mosler] and we started the MMT project in the mid nineties, ninety six or something like that. And Japan was my laboratory, my real-world laboratory.

And people would say to me, oh yeah, they can behave differently because it’s cultural. And what I would say in response was that, well, the monetary system in Japan works identically to the monetary system in the US or in Australia. There’s nuances, there’s slightly different institutional arrangements, but by and large the central bank and the Ministry of Finance, the treasury, the way policy is implemented in terms of monetary flows and the way the financial markets work and the way the bond markets work, they’re the same everywhere, with nuances, but they’re essentially the same.

And I’d say to people, no, their system works like ours. Where the cultural part comes in, though, is that the way in which the policymakers behave and the opportunities that they see or eschew, the consequences that they’re not prepared to weigh or the opportunities they’re prepared to take are influenced by the culture, the system’s the same. It’s just that the policy positions that are taken and the degree of risk and innovation that the policymakers are willing to take is determined by the culture.

In the west, particularly the English-speaking west, but Europe too, the policy makers shifted in the 1970s about, could have been in some countries the 1980s, but typically it was after the first oil shock in 1973. The policy makers were open to shifting from a position that unemployment was a policy target that had to be minimized to a position where unemployment would become a policy tool for discipline and inflation. So the policy tool could go up and down to discipline inflation.

And that’s why those countries—Australia, US, et cetera—had fluctuating unemployment and high unemployment in some cases for many years. And in Japan they hate the idea of unemployment because they understand quite clearly how destructive it is for the social fabric and how destructive it is for the individual and their families and then their local communities and neighborhoods.

And so their willingness to use policy to keep unemployment down is quite different to the way in, say, the US government and the Australian government responds. That’s embedded in their culture, the difference. So if you ask the Minister for Finance whether they’re MMT-oriented, they deny it. They say “no, we don’t do MMT” is what they say to me. Whereas from an MMT perspective, from my perspective as one of the developers of MMT, I understand implicitly that they’re using more of their capacity as the currency issuer than almost any other government is willing to do.

They understand implicitly and explicitly, they understand that for example, the bank of Japan has currently got yield curve control policy. Now, I know you are not all that familiar with what it is, but it’s very simple. They still follow an institutional arrangement that they will match their net spending, their fiscal deficit, their spending greater than taxation.

They will match that with issuing of Japanese government bonds at various maturities ten years, five years, whatever, short and long term. In that sense they are still very conventional. But the bank of Japan understands that it can control the yields on the bonds that are issued. Now, in Australia we allow the yields to be determined by the private financial markets and we allow the whole story that when yields are rising it’s going to be a disaster blah blah to play out in a political sense.

Now, in Japan, the bank of Japan understands that that’s not an inevitability. That as part of the currency issue in government they can control yields at whatever level they want. And so they set a yield on the ten-year bond at .25%, extremely low. And they conduct monetary policy in this specific sense in terms of intervening in the secondary bond markets and standing ready to buy as much Japanese government debt as is necessary.

And what that does is increase the demand for the bonds and pushes down the yields. And so they stare down the financial markets every day and maintain the bond yield at below .25%. Now, it’s very interesting that, forever, the big American and European hedge funds have been testing the resolve of the Japanese government.

And what I mean by that is that they form the view that ultimately the bank of Japan will give up its policy. So they speculate on the yen and on the bond markets by selling it short. What that means is that they form the view that the Japanese government will give up its bond-buying program, which means that the demand for bonds will fall and the bond prices will fall and the yields will rise.

So they sell the bond short. They enter contracts where they’ll say, well, we’ll agree to supply ten year government bonds to another counterparty at a certain price that’s fixed now at the contract stage. And what they’re anticipating is that they will be able to buy those bonds in the spot market in three months time or four months time or something at a lower price and make money.

And they’re doing that on the assumption that the bank of Japan will give up its policy, that the hedge funds will be too great and they’ll make money that way. This is the short-selling behavior. And the problem is, they keep losing money, and they keep losing money because the bank of Japan just stares them down every day and doesn’t stop buying the bonds and hasn’t abandoned yield curve control.

And everybody’s saying, oh, it’s only a matter of time. But this has been going on for years. Not yield-curve control, but similar sorts of behavior and policies. And so, from an MMT perspective, japan is a great example of a nation that has its own currency, that sets its own interest rates, that floats the currency on the financial markets and doesn’t issue debt in any foreign currency.

And it’s an example of a nation like that that has pushed both monetary and fiscal policy parameters beyond conventional limits and demonstrated that all of the mainstream predictions that would be made when policies push to those limits… The Japanese experience has demonstrated that those predictions are incorrect, that interest rates don’t have to rise, that inflation doesn’t have to accelerate, that government bond yields don’t have to rise, that governments don’t run out of money, that bid-to-cover ratios won’t fall below one in the bond markets.

And Japan has demonstrated unambiguously for 30 years since the property market crash, that the predictions that mainstream economists make are wrong. And eventually you’ve got to form the view, and I formed this view in the early 90s, that if your predictions are consistently wrong, then the body of theory has to be wrong. You can’t have it both ways.

And I think Japan demonstrates that mainstream macroeconomics is not knowledge, it’s a fiction. And that the only body of macroeconomics that really is consistent or congruent with what happens in Japan is MMT. That’s the fact. Now the Japanese policy makers won’t admit to that but that’s the fact. From an academic standpoint as a researcher the only body of knowledge that’s consistent with the dynamics of the Japanese economy the financial markets, the government bond markets is MMT. And that’s the fact.

[00:39:34.290] – Intermission

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[00:40:25.630] – Grumbine

You talked about bond sales. Given that Japan has maintained absolute control, they have not given it over to the speculators, that makes me wonder “What is the purpose of bonds in the Japanese economy?”

[00:40:44.190] – Mitchell

Well, that’s an interesting question because if they were really following the logic of an MMT understanding they would say “Well, we don’t even have to issue government bonds,” and the fact that they still do is just really a hangover from the fixed exchange rate system after the Second World War. But people would argue that the bonds provide a safe vehicle for saving.

Now, Japan has a very high household saving ratio and that one of the things there’s quite a dramatic difference is that the Japanese householders will not resort to increasing household debt when, say, sales taxes rise. So in May 1997 the Japanese government introduced a sales tax that came under pressure from mainstream economists like Paul Krugman, who claims to be an expert on Japan but never got any of it right in the 90’s.

So the Japanese government were under political pressure from conservative voices to reduce the fiscal deficit after it had gone up to well over 10% of GDP, which by historical standards and relative standards around the world was quite substantial shift. And so they introduced the sales tax and immediately the economy dived back towards recession.

And as I said to some of my colleagues in Japan not long ago, at the turn of the century the Australian government introduced a new tax. The sales tax went from zero to 10% and there was only a very modest collapse in consumption. Whereas in Japan when the sales tax in May 97 was introduced, there was a substantial reduction in household consumption spending.

And the difference between the two experiences was that Australian households used household debt, increased their use of credit cards, to make up for the loss of disposable income from the tax; whereas in Japan, the households don’t behave like that. And what that means, then, is that if the Japanese government didn’t take a very proactive stance on fiscal policy then they would be in deep recession very quickly.

Whereas in, say, Australia, the Australian government was able to run, after 1996, fiscal surpluses for ten out of eleven years without a recession. And the reason was that household debt went from 70 odd percent of disposable income to nearly 200% of disposable income. So consumption expenditure was maintained which drove tax revenue because tax revenue is linked to activity.

And that allowed the Australian government to run surpluses which only really came unstacked with the global financial crisis. Now, if the Japanese government tried to run those surpluses at any time by hiking taxes or cutting spending, well, then there’d be an immediate recession because the Japanese households will not use credit in the same way as, say, Americans and Australians will use it. Quite different.

[00:44:26.070] – Grumbine

When I think about Japan in general being surrounded by water, they’ve probably got a lot of fishing and other types of industries that revolve around the water. But in terms of production and value-added services, what is the makeup of the industry in Japan, considering that they don’t take on foreign-denominated debt? Being a tiny island nation with many millions of people on it, how do they maintain that within the balance of payments and the import-export analysis of Japanese culture as a whole. How does that look there?

[00:45:11.730] – Mitchell

It’s a very interesting society because over 99% of business activity of production is small to medium sized businesses. Bias towards Small Businesses. We’re used to thinking of Japan because of the way in which they’ve become an export power. We’re used to thinking of them as big companies like Panasonic, Sanyo, Kawasaki, Nissan, Toyota, Honda, these big manufacturing companies.

But they represent maybe .6% or .7%—less than 1% of the Japanese production. So that’s quite different to other countries. It’s a country that’s dominated by very small businesses and they’ve really got very few non-human-productive resources. They’ve got to import things. Now, for better or for worse, they decided that they would become an export power, so they typically run external surpluses.

It’s quite interesting that even though they do outsource some of their assembly work to, say, other countries, like within Asia, they still have a lot of high-quality manufacturing going on within Japan using Japanese labor, which is somewhat different also to the way in which, say, the US manufacturers operate and have conceived their future.

And this is all tied up with loyalty to your local workers, all of that sort of stuff. So a lot of their economy is a small business. Making in tiny little shops was explained to me recently that a lot of people start businesses by converting the front room of their house into a cafe or a small manufacturing plant. And just walking around my neighborhood in Kyoto, you see little shop fronts with big lathes in them and mini factories and food assembly plants just in the little lanes that people live in.

So they have very small businesses with an emphasis on export of their large industry. The heavy manufacturing industry and they’re the pioneers of some of the most innovative manufacturing techniques that the rest of the world have adopted. Their sense of engineering excellence is unbelievable and it comes about from their investment in higher education and research and development and always wanting to do better.

The fellowship that I was lucky enough to be invited to take up was an example of how they’re very open to bringing in international researchers who might give them another edge on something. So they’re really emphasizing innovation and research and development and experimentation. And the other interesting thing at the moment is that their currency has depreciated quite significantly.

And of course the mainstream economists are saying “isn’t this a disaster? Their currency is in free fall and so they’re going to have to change their economic policy.” The reason the currency is depreciated, even though they’re a strong exporting country, is because they have followed the US Federal Reserve putting up interest rates, or the bank of England or the European Central Bank or the Reserve Bank of Australia or New Zealand or wherever.

And so there’s been a redirection of investment funds, speculative money, not foreign direct investment in proper manufacturing, for example. There’s been a race to invest in American financial assets because of the US Federal Reserve’s actions. And it’s also tied up in whether you’re oil dependent or an oil exporter. But that shows up in the form of a depreciation.

Now, if you speak to the bank of Japan officials or even Ministry of Finance officials, the Treasury Department, they’re not the slightest bit concerned about the exchange rate depreciation. They’ve been smoothing out the volatility in it a bit with some foreign exchange intervention but they’re just letting it go, because on the one hand they know that there’s been a dramatic improvement in international competitiveness for their exporters so they just sit back and laugh about that.

Their competitive advantage has just increased dramatically and so they’ll be able to actually export more and maintain employment and income growth. But the other point that they understand is that even though the lower exchange rate will have implications for higher import prices in yen, they’ve been on the phone to importers, wholesalers, et cetera, to put pressure on them not to allow those higher import prices to flow on to consumer prices.

And this is part of the collective nature of the society. So they’ve said to business firms well, look, you just take a reduction in your profit margin for the time being to allow us to get through this period and don’t profit-gouge. You juxtapose that with the way Americans or Australians would behave, and you’re a  world apart. And that’s why their inflation rate is at 3.6% at the moment, which is high by their standards but low by current international standards.

And that means, then, that the workers purchasing power is less compromised and it means that the hit on the material standard of living is less than it is safe for American workers. So putting all that together here, they don’t have to issue debt, but they do. They could achieve the same thing of having a risk-free asset for savers to be able to park their money in for their retirement.

They could solve that in different ways. They don’t need to have the whole mechanics of the treasury market, the Japanese government bond market, but I don’t think they’re going to abandon debt issuance anytime soon.

[00:52:06.490] – Grumbine

The core component of the MMT development work you’ve done in particular, but in general, with the body of knowledge of Modern Monetary Theory, the job guarantee as a whole. With the way that Japanese society is structured, there’s a huge amount of automation in Japan, to your point, very cutting edge – they’re brilliant engineers – but doesn’t seem to be impacting Japan. How might a job guarantee fit into Japanese society? And would it?

[00:52:41.570] – Mitchell

Well, one of the interesting things I learned when I first started studying Japan was that the productivity of the manufacturing sector is extremely high. And that’s their engineering expertise and the march of the robots and all the rest of it. So their actual output per unit of labor hour is extremely high in manufacturing. But as a society overall, their productivity is lower than most other OECD countries.

So how do you account for that? Well, I soon learned in the 1990s when I first went to Japan, if you go to a shop in Japan, you’ll immediately observe more shop assistance. If you walk down the street in Japan, like just in Kyoto at the local homeware shop where you go and buy extension leads and tools and stuff, and they’ve got an underground car park well out the front, several men with these wands that have red lights flashing that give signals and that.

And they’re out there directing people walking along the footpath or people riding their bike along the footpath, directing the traffic that’s coming out of the homeware shop car park. So you say, well, do you ever see that in Australia? Of course not. You take your chances when you’re coming out of a shopping mall car park.

And in the shops themselves, there’s more people serving you and there’s people on the door to welcome you and all sorts of service sector positions that are created and maintained. And of course, if you look at it from a pure Western bean-counter perspective, you say, well, you don’t need any of that labor. You could still run your shop or your service without any of that labor.

And that’s what we do here. We minimize it to make more profit. Whereas in Japan they see that as a part of this collective way of giving everybody a job. Now, there’s two further aspects of that. One is the research program I’m pursuing at the moment, and that is, are these workers, who an English Western cultural perspective would consider to be redundant, are these workers happy in their jobs?

So are these men that sit outside construction sites or shopping centers with their little wands waving traffic here and there, to make sure everybody traverses the space in a safe way, are they happy? That’s the question that’s on my mind at the moment and I’m told they are, but we need to study that. But the second question is, and this comes out in my writing, as you probably will be aware, is that what’s our notion of productivity?

In the West, we think of productivity as being purely in terms of private terms, private costs and benefits. So the productivity for a firm is minimizing the import and maximizing the profits. Now, in Japan, in my view, they have a different concept of productivity and they have a much more social concept of productivity.

The manufacturing firms that are export-competitive and have to operate on the same terms as a US manufacturing firm or wherever, they have the same sort of idea of productivity as we do in engineering, minimize costs, maximize revenue, whereas the service sector is quite different because that’s not competing with anybody externally. And so they can define their own rules.

And they’ve worked out that it’s socially beneficial to have workers working with incomes, that can go to local shops and buy stuff and keep other shops going and other businesses going and provide for their families. And there’s less crime as a consequence and there’s less ill health and people are working. And all the things that we know accompany a highly employed economy, all the social benefits of that, of coherence of society and stability and all the rest of it, they’ve worked that out.

And so for them, productivity, we might apply a bean-counter approach to the service sector in Japan and we’ll say, oh, it’s deeply unproductive, what a load of waste and make-work and all the rest of the nonsense that we go on with. Whereas for them it’s perfectly logical that this is a harmonious situation, that it’s actually nice to go into a shop and someone welcomes you there and asks you whether you’ve got any questions.

And it’s actually nice to know that when you’re riding along a path on your bicycle that there’s no one going to come rushing out of a car park and knock you over. And so you give a little bow and nod of your head and you say, “arigato,” thank you, and that’s really a nice society. So this is a society that would be very amenable to a job guarantee because they wouldn’t ask the questions that Western critics would ask is all this make work, all this leaf-raking and all of this stupid, non-productive work? Well, they understand implicitly in Japan that productivity is a social concept, not a private concept.

[00:58:36.870] – Grumbine

That’s very powerful. I appreciate that. I wondered about that because there is so much robotics there in general. But it sounds like as a society people aren’t getting left behind regardless. In the US, it’s very much about cutting the fat. I live in a country with neoliberal austerity. At every turn, they can possibly make life just a little bit harder.

For those who do not have capital or working money and investments, they are left in absolute precarity. All this sounds so foreign. If I mentally morph into Japanese culture through our conversation here, it just doesn’t seem like it is even a thing. Everything that I’m suffering myself personally and people who are far worse off than I in this country, these are things they wouldn’t have to worry about in Japan.

This is something that needs to get more exposure. So people begin dreaming a better dream at least. Because if Japan gets it right, if they at least have people thriving, why can’t the rest of the world? Especially when Japan is a tiny island nation compared to other major countries that have vast resources, but squander it through austerity by funneling it to the richest 1%. It seems like an insane proposition that we allow to happen when you can see quite clearly there are alternatives.

[01:00:13.090] – Mitchell

There are alternatives. So you can live in Japan for a period and live there, not just visit there as a tourist. And yeah, you see all these anomalies that from a Western programmed point of view. I often ask myself when I was riding around the streets or going down to the shop at lunchtime or something, look at all those workers. What are they doing? And then I’d say, stop analyzing them from a bean-counter perspective.

That’s not an appropriate frame to understand what’s going on here. So the only question I started to think about was if you look at the data, national surveys show that Japanese people, when they start getting older, become unhappy. Whereas for Americans, the same surveys show that Americans are unhappy during their working lives, but when they retire, if they’ve got enough means, they become happier.

So there’s a complete reversal of sentiment by age profile. And so what I’m currently working out is the Japanese people are so imbued with the idea of the value of work and their contribution to each other and society that when they retire, they lose a sense of that, to some extent. It’s not a rabid, consumption-based society. So that’s my current understanding.

Whereas, say in America, it’s a consumption-based society. And when you’re working, you’re under the pressure. And when you retire, if you’ve got means and I understand that increasingly people don’t have means, but if you’ve got means, well, then you can become a consumer. And you don’t have to go to work and you can go and play golf or go sailing down rapids in your kayak or whatever you do.

And so you’re happier. So the questions that I’m wanting to explore are, are all these workers happy who are doing all of these jobs? That a typical English-speaking westerner would think would be unnecessary because I can understand that they are necessary to the social fabric of Japanese society and they make people definitely happier doing them. But are they intrinsically happy doing them or do they have the same sense of futility that we would impose from our cultural perspective? I don’t think so.

[01:02:57.770] – Grumbine

More will be revealed. Sir, it sounds like you’re going to be going back and forth quite a bit over the coming years.

[01:03:05.450] – Mitchell

Oh, yeah. I’ve got a position now at the university that I’ll go back to next year at some point. I’m just trying to work out when. And we’ve got a big research program unfolding and terrific group of researchers, older and younger, experienced and inexperienced. And yeah, it’s a fabulous place to live and to be, so, yeah, I’ll be going back.

[01:03:30.050] – Grumbine

Well, sir, it was a pleasure talking to you. This was really edifying to me. I really appreciate the deep dive. I learned an awful lot, and I love you, Bill. You’re a great guy and I really appreciate your insights and I appreciate your willingness to share your knowledge. It has been one of the highlights of my personal life. So thank you with all my heart. I really appreciate it.

[01:03:54.840] – Mitchell

Well, thanks for inviting me and keep in touch. Take care.

[01:03:59.170] – Grumbine

Absolutely. Tell Louisa I said hello, please.

[01:04:02.290] – Mitchell

Oh, yeah. She loved being in Japan, riding the bike around, even though she had to work as well. But she found it as really interesting and nice place to be as I did.

[01:04:15.890] – Grumbine

Fantastic. Give us some parting words. Are we running MMT Ed. What is the next run? What else is going on? Where can we find more of your work, Bill?

[01:04:26.330] – Mitchell

We’re slowly but surely building up MMT Ed, it’s just like funding, really, that constrains that, we’ve run our first large course three times now. There’ll be another run next period, and a second course is nearly finished, and we’ll release that soon. And I’ve got a very big development underway at the moment.

I’m not going to tell you what it is, but it should be fun. I’m working with a Japanese Manga artist and she’s terrific. And we’re working up a storm on that, so that’ll come out fairly soon, I hope.

[01:05:05.410] – Grumbine

All right, so some things to look forward to. Your blog, Billy Blog…

[01:05:09.310] – Mitchell

That’s just a habit. I get up and spend a bit of time on that and that’s going to change soon. I’m just working out ways to make it more secure with all this hacking that’s going on and shifting some of the action into MMT ed to push that on further. But, yeah, Billy Blog is just a habit.

[01:05:35.530] – Grumbine

It’s a good habit!

[01:05:35.530] – Mitchell

I hope so. I hope it helps people distill some of these ideas down to a level that they can communicate themselves in. So that’s just part of a day’s work and no problem with that. But our big venture is MMT Ed and we’re just trying to get funding for it and that’s not easy. I understand that funding is pretty constrained, but we’ve got some new developments that are going to come out very soon and I’m quite excited about them, actually. So we’ll see whether they’re accepted or not.

[01:06:09.110] – Grumbine

Well. Very good, Bill. Thank you so much, sir, for joining me and we will talk very soon. This is Steve Grumbine with Macro N Cheese. My guest, the great Bill Mitchell. We are out of here.

[01:06:28.410] – End credits

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts, and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.

Bill Mitchell  

Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. 

He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010. 

You can find music and other things on his Home Page. 

@billy_blog on Twitter 

Blog: bilbo.economicoutlook.net 

MMTed: enroll in the next session 

Books: 

Reclaiming the State, by Thomas Fazi and William Mitchell 

Macroeconomics, textbook by William Mitchell, L. Randall Wray, and Martin Watts 

Bill’s writings on Japan: 

Zero trading in 10-year Japanese government bonds signals Bank of Japan’s supremacy 

Two diametrically opposed approaches to dealing with inflation—stupidity versus the Japanese way 

More blog entries on Japan…

Warren Mosler, moslereconomics.com 

Warren Mosler (born 1949) is an American hedge fund manager  and entrepreneur. He is a co-founder of the Center for Full Employment and Price Stability at University of Missouri-Kansas City. and the founder of Mosler Automotive.  

Mosler is a proponent and research financier of post-Keynesian Modern Monetary Theory. (from Wikipedia) 

Warren Mosler, a Deficit Lover with a Following, NY Times, 2013 

Japan’s National Diet   

The National Diet is the national legislature of Japan. It is composed of a lower house, called the House of Representatives (衆議院, Shūgiin), and an upper house, the House of Councillors (参議院, Sangiin). Both houses are directly elected under a parallel voting system. In addition to passing laws, the Diet is formally responsible for nominating the Prime Minister.  

Quantitative Easing 

Quantitative easing as we know it is a kind of monetary policy use by the central bank of a country to stimulate the economy when other conventional methods are not working. This involves the central bank buying financial assets from the commercial banks using the money it creates newly. This is different from the otherwise buying/selling government bonds to influence market interest rates. The policy is designed to inject money directly into the economy, when there is a sharp fall in demand because of reduced spending. 

Quantitative easing increases the reserves with the banks and also raises the prices of the financial assets. 

Even though the idea is to stimulate the economy, it’s important to understand who really benefits from these actions. 

In a recent report, the Bank of England has said that their own Quantitative Easing policies have mainly benefited the rich people of the country. As a consequence, it ends up increasing the income inequality and the consequent social tensions. 

This is also alarming for the US. Quantitative easing increases the financial asset prices, and according to Fed’s data, the top 5% own upto 60% of the country’s individually held financial assets. This includes 82% of the stocks and upto 90% of the bonds. 

So, any QE action by Federal Reserve will only really help the rich not the rest of America. 

From financetrain.com 

 Quantitative Easing 101, article by Bill Mitchell 

Federal Job Guarantee 

Bill Mitchell’s blog posts on the job guarantee 

Pavlina Tcherneva’s Job Guarantee FAQs 

The Case for a Job Guarantee, book by Pavlina Tcherneva

More Macro N Cheese Episodes with Bill

Episode 183 – Imports, Exports and Empire with Bill Mitchell

Episode 155 – Duality with Bill Mitchell

Episode 122 – The Case Against a Universal Basic Income with Bill Mitchell

Episode 89 – Juxtapositions with Bill Mitchell

Episode 39 – Trade, Foreign Exchange and Modern Monetary Theory: A Field Guide with Bill Mitchell

Episode 7 – The World of MMT with Professors Stephanie Kelton & Bill Mitchell

Episode 1 – Putting the T in MMT with Professor Bill Mitchell

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