金曜日, 6月 28, 2019

Japan still to slip in the sea under its central bank debt burden – Bill Mitchell – 2018/11/22

Japan still to slip in the sea under its central bank debt burden – Bill Mitchell – Modern Monetary Theory


Japan still to slip in the sea under its central bank debt burden

President Trump banned a CNN reporter only to find his position overturned by the judicial system. Well CNN is guilty of at least one thing – publishing misleading and alarmist economic reports about Japan. In a CNN Business article last week (November 13, 2018) – Japan’s economy has a $5 trillion problem – readers were told that the Bank of Japan has no “dwindling options to juice growth if a new crisis hits” because “it’s now sitting on assets worth more than the country’s entire economy”. The real story should have been that the Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT). That is what the Japanese experience since the early 1990s tells us. And all the stories about special cases; cultural peculiarities, closed markets, etc that the mainstream economists wheel out when another one of their predictions about how Japan is about to sink into the sea as a result of its public debt levels, or that interest rates are about to go through the roof because of the on-going and substantial fiscal deficits; or that inflation is about to accelerate because of the massive monetary injections; and more, are just smokescreens to divert our attention from the poverty of their analytical framework. The Japanese 10-year bond trade is called the ‘widow maker’ because hedge funds who try to short it lose big. The Japanese monetary system is my real-time, non-linear economic laboratory which allows all the key macroeconomic propositions to play out live. And MMT is never very far off the mark. Try juxtaposing New Keynesian theory against Japan – total dissonance.

The same old

At some regular interval, which I guess I could work out if I cared, the media runs a story that goes like this.

First, there is a sensational headline, which usually has some massive monetary figure listed that is so large that it befuddles the reckoning of ordinary citizens (even me) who are used to dealing in 10s not trillions.

Of course, that is the intent. Evoke fear and alarm rather than understanding.

Then the story tells us that the Bank of Japan’s balance sheet has expanded by some massive amount. Okay.

Why is that a problem?

Well hints are provided about the dangers of ‘printing money’ (none ever substantiated) – it is all nod-nod-wink-wink sort of stuff.

Then the reader is usually told that the central bank risks insolvency if the bonds go south.

The disconnect in the claims is never made obvious – if the central bank is out there ‘printing’ all this money how can it go broke.

The twain is never met here!

Perhaps the journalist or Op Ed writer hasn’t twigged to this internal inconsistency.

After all, they are just pushing through an 800-1000 word template and all the usual points have to be made. Forget logic and consistency.

Then the reader is told that the strategy hasn’t worked anyway – inflation remains low and despite low interest rates, economic activity is hardly booming – yet the disconnect between that observation and some of the more salacious claims about hyperinflation etc is also never really made.

The observation that despite considerable efforts by the Bank of Japan to kickstart its inflation rate little progress has been made tells us that monetary policy is a relatively ineffective macroeconomic tool.

Which is counter what the mainstream New Keynesian consensus tells us.

That is the real story here that escapes the journalists and commentators.

Finally, the stories usually touch on the assertion that with so much bond buying and such an enlarged balance sheet, the Bank of Japan is not incapable of defending the economy from the next crisis.

And the scaremongering is complete.

The reader isn’t allowed to think that maybe fiscal policy is the main game anyway and its capacity is not impeded by past deficits or enhanced by past surpluses.

In other words, the Japanese government has all the ‘fire power’ it ever needs to respond to a non-government sector spending collapse whether it come from domestic demand or via the export markets.

It can also respond to any natural or unnatural disaster.

And so the reader turns the pages and forgets about all this until some time later when the story is recycled by some other bored journalist who has nothing better to do on that particular day.

That was what was dished up in CNN Business’s latest offering cited in the Introduction.

We read gems like:

1. “An epic bond-buying spree by Japan’s central bank means it’s now sitting on assets worth more than the country’s entire economy.”

2. “following years of money printing aimed at jump starting the country’s stagnant economy”.

3. “The years of heavy stimulus have warped parts of Japan’s financial markets and left the central bank with dwindling options to juice growth if a new crisis hits. But the splurge is unlikely to end anytime soon.”

Note the language – “warped”, “juice”, “splurge” – all loaded to make out something is wrong.

4. “Kuroda has said the bank won’t consider ending the protracted stimulus effort until that goal is reached. Risky strategy. But that may be an impossible task, and continuing the stimulus program indefinitely carries significant risks.”

Which risks?

Come in spinner! Just in time. These type of articles all have to quote some doom merchant from the private sector.

So we get a quote from a person with a Masters degree who has been an accountant and worked for Credit Suisse:

There are limits to how many assets the Bank of Japan can buy.

Yes, the bank can only buy what is for sale.

And as long as the Japanese Finance Ministry keeps running fiscal deficits and does not change the unnecessary institutional arrangement of matching those deficits with bond issuance then there will be bonds to buy.

The actual concern here from the commentator is revealed next – the fact the central bank is keeping interest rates low is “making it too hard for commercial banks to make profits.”


Negative interest rates have squeezed their margins, and the huge asset purchases have effectively killed regular trading in the once lucrative bond market.

Ah. The corporate welfare argument. They want public debt because it gives them a risk-free asset to make money from.

And, by way of finale, the restatement of the doom:

The Bank of Japan’s ultra-loose monetary policy also leaves it with little in the way of fire power to help prop up the economy in the event of another big crisis.

So, Japan slips into the sea … eventually. Sorry Jimi.

Data update – Japan goes on in its merry way

Defying mainstream macroeconomic predictions, that is …

The following graph shows the proportion of total national government debt in Japan that is held by the Bank of Japan from January 1990 to September 2018.

They now hold 48 per cent.

In October 2010, the Bank of Japan held 8.3 per cent of all the outstanding JGBs (across most maturities).

Since October 2010, when QE1 began (see below), the change in Bank of Japan holdings of Japanese Government Bonds has been 131 per cent of the actual change in outstanding JGBs.

In the year to date, the increase in central bank holdings of JGBs has exceeded the actual change in outstanding JGBs by a factor of 2.43.

Further, the secondary JGBs market has been very thin since the QQE program began and sellers in that market have declined.

Why? Because as the auction yields have gone negative, current bond holders who purchased the debt instrument at positive yields, will worry about having funds (from sales) which are only going to attract negative returns (losses). The smart strategy in that case is to maintain long positions.

So the corporate welfare is being squeezed.

Any talk that this could render the Bank of Japan insolvent is erroneous. Central banks can never become insolvent.

See, for example, this blog post – The ECB cannot go broke – get over it (May 11, 2012).

What these monetary operations really mean is that the Japanese government is spending by using credits created by the Bank of Japan, whatever else the accounting structures might lead one to believe.

With inflation low and stable, these dynamics surely put paid to the various myths that a currency-issuing government can run out of money and that central bank credits to facilitate government spending lead to hyperinflation.

See the analysis below for more on inflation.

The next graph that follows is the Total assets held by the Bank of Japan as a per cent of GDP (blue line) and the proportion held as Japanese Government Bonds between the March-quarter 2000 to the September-quarter 2018.

This graph recently excited the commentators because in the June-quarter 2018, Total Assets held at the Bank of Japan exceeded total GDP (that is, moved above 100 per cent).

In the September-quarter 2018, total assets stood at 102.2 per cent of GDP (and JGB holdings were 86.7 per cent of GDP).

There is no problem that is worth detailing in these figures.

What these figures tell us that the Bank of Japan’s strategy to buy JGBs in large volumes in order to, in their words, increase the inflation rate, has failed.

This demonstrates how ineffective monetary policy is in influencing the path of the inflation rate, despite the massive increase in central bank assets.

QE history in Japan

The Bank of Japan’s quantitative easing history began in earnest in March 2001 (QE1) and this increased the BOJs monetary base by around 60 per cent.

You can see that in the first graph above.

The Bank terminated that program in March 2006, whereupon the Bank sold down its holdings (also shown in the graph).

A second (QE2) program began in October 2010 and as time has passed it has become QE3, which is a much larger scale intervention that that began in April 2013.

Another way of looking at the relationship between monetary policy changes in Japan and the evolution of the inflation rate is shown in the following graph. The shaded blocs are the three QE periods during the sample shown.

I indexed the monetary base and the Consumer Price Index to 100 in January 1990.

The graph shows the evolution of these indexes up to October 2018.

The monetary base index was at 1265.3 in March 2018, while the CPI was at 113.7.

The overwhelming conclusion is that there is no relationship between the evolution of the monetary base (driven by the Bank’s purchases of JGBS in large volumes) and the evolution of the inflation rate.

One could argue that the reversal of QE1 revealed a lack of commitment by the BOJ to really drive the inflation rate up.

My assessment is that QE doesn’t work whether it is extended for lengthy periods or not.

The reversal that followed the introduction of QE2 just reduced the monetary base (and the total assets held by the BOJ).

Inflation in Japan

Here is the annual inflation rate since January 1970 to October 2018.

The monetary policy gymnastics implemented by the Bank of Japan in search of a higher inflation rate have been largely unsuccessful.

The spike in inflation you can see in 2014 was due to fiscal policy (consumption tax hike), which should tell you something about the relative strength of each of the two aggregate policy instruments (monetary and fiscal).

Inflation expectations

The latest data on inflation expectations is also indicative that the QE policies are not having the desired effect.

The New Keynesian mainstream macroeconomics suggests that prices are adjusted to accord with expected inflation. With rational expectations, the mainstream models predict that inflation will respond one-for-one with shifts in expected inflation.

The Bank of Japan has been trying to manipulate that ‘theoretical claim’ in real space through its QE experiments.

And it is not having much success.

The following graph is taken from the – Tankan Summary of “Inflation Outlook of Enterprises – the latest data being released on April 2, 2018, covering expectations up to October 2018.

Firms are asked to assess the future price movements in output prices and consumer prices.

The first graph shows the outlook for output prices – 1-year ahead, 3-years ahead and 5-years ahead.

While the expectations have risen in recent months, that is more the result of increased output growth. In the early periods of QE3, the expected inflation rate for output prices fell sharply.

The second graph shows the outlook for consumer prices – 1-year ahead, 3-years ahead and 5-years ahead. It also includes the actual inflation rate (Purple line).

Again it is hard to see any substantial movement in consumer price expectations.


The fact that the banks are complaining about the lack of profitability as a result of the Bank of Japan’s actions tells you who is in charge.

The bond markets are supplicants as are the banks.

They rely on the public sector to make profits. If the public sector acts in the broader interest then the financial markets get squeezed.

To repeat the reality again:

1. The Japanese government can never run out of money (yen). It is impossible. Therefore it can never become bankrupt.

2. The Bank of Japan can maintain yields on JGBs at whatever level it chooses, at whatever maturity range it targets, and for as long as it likes. The bond market investors are incidental to that capacity and are supplicants rather than drivers.

3. The size of the Bank of Japan’s balance sheet (monetary base) has no relationship with the inflation rate.

4. If the Bid-to-Cover ratios at bond auctions fell to zero – that is, private bond dealers offered no bids for an auction – then the government could simply instruct the Bank of Japan to buy the issue. A simpler accounting device would be to stop issuing JGBs altogether and just instruct the Bank to credit relevant bank accounts to facilitate the spending desires of the Ministry of Finance.

5. If private investors choose to buy other assets then the Japanese government (the consolidated central bank and treasury) could just buy more of its own debt – to near infinity.

Please read the following blogs – Building bank reserves will not expand credit and Building bank reserves is not inflationary – for further discussion.

Once you appreciate the fact that the central bank can control government bond yields at any level it chooses, the next step in the transition is to realise that such interventions are, in fact, redundant.

The best thing that a sovereign government can do is consolidate its treasury and central banking operations (make them consistent in a policy sense) – which would make macroeconomic policy totally accountable to voters unlike today where the central bankers do not face election.

Then the treasury should net spend as required to ensure that the economy achieves and sustains full employment and price stability. This may under some circumstances (very strong external surpluses) require a fiscal surplus, but normally for most countries it will require continuous fiscal deficits of varying proportions of GDP as the overall saving desires of the private domestic sector varied over time.

The treasury should issue no debt at all. Even those who argue that the government should issue short-term paper to allow the central bank to reach its target interest rate via liquidity management operations now realise that interest payments on excess reserves accomplishes the same end.

All those commentators who claim that accelerating inflation would result if governments abandoned debt-issuance but continued to run deficits have been repeatedly shown to be wrong.

No increased inflation risk would be introduced by the government refraining from issuing debt to match any fiscal deficits it might be recording.

The monetary operations that accompany fiscal policy changes have very little impact on increasing or decreasing the inflation risk of continuously running an economy close to full capacity.

The risk is real but can be managed.

Me and Donald

I took the UK Guardian’s (November 21, 2018) – How populist are you? – quiz yesterday.

I thought the quiz was an odd cultural artifact.

The Tweet by Ronan Burtenshaw, the European editor of the Jacobin magazine, which is now identifying itself as the – Tribune Magazine – summarised how these sort of quizzes reflect underlying biases.

Here it is:

Anyway, I did the quiz and I won’t say who I was most alike because I am actually very much unalike the person (which just shows the categorisation errors in the exercise) but I felt relieved that I did score this outcome:

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.