“It is not a lie if you believe it!”


The Nikkei has run an article suggesting that the Bank of Japan buys up all of the sovereign debt (c. 40% of total) and convert it into zero interest rate perpetuals. The idea is that the debt magically disappears. You can rename the debt however you want but the message in writing off 2.4x your national GDP to financial markets is highly negative. How would the BoJ offset the net-liability balance sheet given the $10 trillion in assets marked to market would be ZERO?


Milton Friedman said

    “There are 4 ways in which you can spend money.
  1. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.
  2. You can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.
  3. I can spend someone else’s money on myself, then I’m sure going to have a good lunch!
  4. Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get.”

It is a flawed logic to suggest that debt could be stored and forgotten about. The BoJ’s balance sheet has trebled to Y426 trillion (e.g. US$4 trillion – note the US Fed reserve balance sheet is $US4.46tn for an economy triple the size) since April 2012 or effectively 80% of GDP The BoJ would effectively need to treble the balance sheet again to monetise all of the outstanding national debt. If you had to hold dollars or yen based on the central bank balance sheet,  it is clear the US$ would be preferable in the longer run based on logic.

What needs to be taken into account that Japan needs to raise around Y40-50 trillion of debt every year to cover the tax revenue shortfall in expenditure – aging population etc. Of course the MoF could sell new bonds to the BoJ with perpetuals to that value every year but if it was free why wouldn’t the MoF issue more bonds for the BoJ to buy to build new schools, hospitals, highways, infrastructure etc. The problem of that is if the government get high on the hog of such spending then the risks of inflation get accelerated if there aren’t enough workers or materials to build.

The big problem is that you can’t print your way to prosperity. Global markets would frown very deeply on the yen were the BoJ able to print in perpetuity. Noone in their right minds will want to hold an asset where a central bank can print off what it owes you. If the MoF issued new bonds with yield the coupon would need to be at such a premium to offset the risk of the likelihood that BoJ activity would be to pay it thru printing. That would be punitive to equity, currency and corporate bond markets. Japan would become a banana republic.

Therefore this shift to hard assets (some of the worst performing assets out there) looks more beautiful by the day.


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