Toshio Masuda

Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder

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(This issue is submitted to a Washington D.C., Seattle, and Zurich think-tank as the English edition of “Straight from Shoulder”.)

"Straight from the shoulder " by Toshio Masuda July 6, 2017
( Free of charge to the people I met)
Time talks

The bodies that make decisions about international reserve currencies have adopted easy money policies: the Federal Reserve Board (FRB) since October, 2008, and the Bank of Japan (BOJ) and the European Central Bank (ECB) since 2013; but in every case, they have failed to reach the price target of 2%. In repeated interviews, Governor Kuroda of the Bank of Japan has given the reason as bringing about a reduction in the price of crude oil, but although crude oil has remained at the high level of about $50 for a long time, without a corresponding rise in commodity prices, the governor, having lost his justification, works hard to change the subject.
On June 14 of this year, Chairwoman Janet Yellen, at the FOMC (Federal Open Market Committee), addressing the issue of unattained commodity prices, mentioned the unemployment rate (4.3%), which is at the lowest level since 2000, an expression of hope in the so-called Phillips curve (lower unemployment rate - increase in wages - increase consumption - rise in prices). The Phillips curve is a theory proposed by William Phillips (1914-1975) that was widely used throughout the period of postwar economic growth from 1960s until the mid-1970s, but fell into disuse during the subsequent period of Stagflation (economic stagnation) characterized by high unemployment and sharply increasing prices, and today his theory is considered as little more than a "quaint, old-fashioned theory." The fact that Chairwoman Yellen has pinned her hopes on a moribund theory demonstrates that FRB monetary policy has reached its limits.
The Abe Cabinet, in order to brush aside increasing doubts about Abenomics, which is all puffery without results, and about the Quantitative and Qualitative Monetary Easing policies of the Bank of Japan, has repeatedly invited the Nobel laureate Paul Krugman to Japan; and because he is a theorist of money supply/inflation theory and an advocate of “Money talks”, he has been theoretically supporting the monetary easing policies of the major central banks up until the present. However, the policy of monetary easing either has its limits, or it has been ineffective, and accordingly, Krugman’s money supply/inflation theory is now on its deathbed. Now it’s Toshio Masuda’s turn.
Two years ago, apples grown in northeastern Japan were selling in Parisian supermarkets for more than twice the price of local apples, and each incoming shipment was sold out quickly. Today, two years later, the price of Japanese apples is not much different from locally-grown apples. Once consumers had discovered the delicious taste of Japanese apples, they stopped eating local apples and began to purchase the Japanese fruit even if they had to part with more money, but then, having gradually become accustomed to the taste over the intervening two years, this willingness to pay a premium became less frequent, and then it disappeared completely. Initially, they had eaten Japanese apples three times a week, but now only once a week. During this two-year period, the price of Japanese apples continued to fall, until now it is almost the same as the local produce. The consumer’s motivation to purchase high-quality, high-priced commodities or or services declines over time. (There is a coefficient for the passage of time and decline in motivation to purchase any commodity or service.) For example, even monopolistic, high-quality goods or services are subject to deflation. Unless it's possible to put Japanese-grown apples on the shelves that are even more delicious than before, and to do this before consumers who once purchased Japanese apples three times a week change their pattern to twice a week, then the price will decline over the long term. Because it’s impossible to continuously and eternally improve the quality of the same product or service every three months, it’s impossible to stop deflation by business efforts. And because time does not flow backwards, all the more so. As countermeasures against deflation, businesses need to downsize, lower supply capacity, and work hard at innovation. The sense of values needs to change from “big is good” to “small is good.”
However, even if, for example, improvements and innovations in business effort and supply-and-demand relationships continue, “you cannot defeat time.” In other words, up against deflation, you cannot win. We should not be battling against deflation; rather, we should construct a system that obeys deflation, that accepts deflation according to my “time = deflation thesis.” The fact that the NY Dow hit a new historical high is a phenomenon that runs counter to the “time = deflation thesis” of Toshio Masuda, which is now on its way to becoming universal.

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