On the Benefits of Higher Inflation in Japan

In his blog, John Cochrane critically reviews arguments in favor of higher inflation in Japan.

He approves of the view that a conventional stimulus argument does not make much sense—given that Japanese growth is around potential and unemployment is low.

He does not approve of the view that inflation would be helpful by lowering (public and private) debt burdens. He doubts that an inflation induced default on outstanding debt would significantly lower taxes (rather than lead to more government spending) and that even if it did, such a default would increase the optimism of young households.

He also questions whether inflation could significantly reduce the real value of Japanese public debt (because debt maturity is short) and whether the debt burden is actually large (given near zero interest rates).