Japan: Fiscal Stimulus Until Inflation

by Dirk Ehnts, Econoblog101 Paul Krugman notes in a column last week that Japanese authorities plan to increase government spending until inflation results and expect that they still have to pay zero interest rates on government bonds. Here is the main issue according to Prof. Krugman: Enter Mr. Abe, who has been pressuring the Bank of Japan into seeking higher inflation — in effect, helping to inflate away part of the government’s debt — and has also just announced a large new program of fiscal stimulus. How have the market gods responded? The answer is, it’s all good. Market measures of expected inflation, which were negative not long ago — the market was expecting deflation to continue — have now moved well into positive territory. But government borrowing costs have hardly changed at all; given the prospect of moderate inflation, this m...