[Emil’s Summary] Dr. Milton Friedman, in a December 1997 article, correctly diagnosed what was wrong with the Japanese economy: not enough money. His prescription? Quantitative easing. It was, unfortunately, malpractice. In late April 2020, the Bank of Japan announced its 24th iteration of it. Maaaaaaaaaaaaaaaaaaaaaaaalpractice.

It is often said that there is, “nothing new under the sun”, and with a few exceptions (e.g. negative nominal interest rates, negatively priced oil, TikTok) that is true, even with a monetary gewgaw like quantitative easing. Japan, so as to revive its economy, has been implementing different flavors of QE for just under two decades now (that’s all one really needs to know about its effectiveness). In this episode we explore what lead up to the first QE program with a tour guide: Milton Friedman.

What was Friedman’s analysis of 1970-90 from the perspective of money supply and economic activity? How did the Bank of Japan seemingly lose its way during the 1990s when it had ‘got it all right’ during the 70s and 80s? Why did Friedman believe that QE would be the solution? Why did the Japanese bond market disagree from the get-go? Why is a sovereign bond market important anyway? Why do low rates – not high – signal monetary tightness and vice versa?

On the other side of the Pacific, in late 2001, with the Good Ship Q.E. having already been launched, researcher Mark Spiegel from the Federal Reserve Bank of San Francisco raised a critical question: what if private banks don’t want to put this newly ‘printed money’ to work? In Japan that question has remained unanswered for two decades. In the United States and Europe? Over a decade. Is it a matter of difficulty or ideology that impedes the answer? We believe it is the latter.

Articles Discussed:

There Was Never A Need To Translate ‘Weimar’ Into Japanese by Jeff Snider
Reviving Japan by Milton Friedman
Quantitative Easing by the Bank of Japan by Mark Spiegel
A Tally of 23 Japanese QEs by Jeff Snider