Shirakawa snubs ’30s-style JGB-buying for rebuilding

by Toru Fujioka and Takashi Hirokawa

Bloomberg

Bank of Japan Gov. Masaaki Shirakawa is under fire for refusing to consider 1930s-style purchases of government bonds to fund reconstruction from the nation’s largest earthquake on record.

Shirakawa repeatedly attempted to quash direct buying of government debt, a step allowed in extraordinary circumstances with the permission of the Diet, in appearances before lawmakers this week. The policy would undermine confidence in the yen and provoke a surge in consumer prices, he said at Diet fiscal and finance committee hearings.

“If this isn’t a special situation, what is?” Kozo Yamamoto, a Diet member with the Liberal Democratic Party, said in an interview this week. Yamamoto advocated a ¥20 trillion reconstruction program funded by BOJ debt purchases. A group of ruling party lawmakers submitted a similar proposal to Finance Minister Yoshihiko Noda on March 18, according to a Web log posting by Democratic Party of Japan member Yoichi Kaneko.

The debate parallels discussions last year in the U.S. and Europe, where the Federal Reserve and European Central Bank adopted bond-buying programs. In Japan, the developed world’s most-indebted country, some lawmakers have also proposed tax increases for the first time since 1997, when such a step helped tip the economy into a recession.

Shinichiro Furumoto, director general of the ruling DPJ’s tax committee, has floated a 1 percentage point increase in the consumption tax.

Benchmark 10-year government bonds yielded 1.205 percent as of 11:21 a.m. Friday in Tokyo, down 9 basis points, or 0.09 percentage point, since the March 11 magnitude 9.0 temblor and ensuing tsunami devastated the Tohoku region. Prime Minister Naoto Kan’s government said Wednesday that the damage amounted to as much as ¥25 trillion.

Noda said Thursday he wants to pass a supplementary budget to fund rebuilding next month. Using public bond sales to pay for the package would add to a debt the Finance Ministry projected in January would increase to a record ¥997.7 trillion in the year starting April 1.

“Japan’s fiscal situation means the government can’t increase spending for reconstruction without being clear about how to fund (such activity),” said Takero Doi, a professor of economics at Keio University in Tokyo and a member of an advisory panel to the Finance Ministry.

Raising income tax may be the best option, Doi said. An increase in the 5 percent sales tax should be reserved for social security costs dealing with the country’s aging population, while the corporate tax shouldn’t be hiked because Japan’s levy is already the second-highest among developed nations, he said.

Politicians including Yamamoto and Kaneko oppose tax increases to fund the reconstruction because it could sap private demand that’s already hurt by the quake. Japan’s gross domestic product contracted at a 1.3 percent annualized pace in the fourth quarter and Morgan Stanley MUFG Securities Co. predicts it may shrink as much as 12 percent in April to June.

“There’s no way that taxes can be increased when there’s deflation,” the LDP’s Yamamoto said. The proposal submitted by the DPJ’s Kaneko called for no tax increases for several years and reductions in some levies.

Kaneko’s group cited Japan’s experience of the 1930s as evidence that BOJ purchases of public debt are an effective means of ending deflation. Some lawmakers last year had already pushed the central bank to step up its monetary stimulus to bolster the recovery from Japan’s deepest postwar recession.

“Bank of Japan bond underwriting is a policy that is evaluated highly worldwide because it helped Japan recover from the Great Depression before others,” when the policy was implemented by then Finance Minister Korekiyo Takahashi, the Kaneko group’s proposal said.

Takahashi boosted spending 34 percent in the 1932 fiscal year, financing it by doubling bond issuance, according to a report by the Japan Center for Economic Research. The BOJ’s underwriting continued for 14 years until the end of the war, with the ratio of bonds bought by the central bank peaking in 1933 at 89.6 percent, according to a 2001 paper by the bank.

Takahashi’s efforts helped lift the economy out of deflation at a time when the U.S. was still in the midst of the Great Depression, the Japan Center for Economic Research’s Yuji Kuronuma said in his 2009 report.

“In 1933 and 1934, personal spending and business fixed investment once again fueled a growing economy,” Kuronuma wrote.

Japan has again been fighting to end deflation. Consumer prices excluding fresh food fell for the 24th straight month in February, the statistics bureau said Friday. Prices declined 0.3 percent from a year earlier, matching the median estimate of 23 economists surveyed by Bloomberg News.

The BOJ has purchased government bonds through the secondary market, and includes the securities in its ¥10 trillion asset-purchasing plans. The Fed and ECB’s programs are also done through the secondary market.

“If a central bank starts to underwrite government bonds, there may be no problems at first, but it would lead to a limitless expansion of currency issuance, spur sharp inflation and yield a big blow to people’s lives and economic activities,” as has happened in the past, Shirakawa said Tuesday.

The BOJ also has a separate self-imposed rule of not holding more government bonds in its portfolio than bank notes outstanding. Shirakawa said Friday the BOJ is “currently buying a large amount of government bonds” to offer abundant cash to financial markets.

Japan’s fiscal spending in the 1930s was used to build up the military in the runup to the war. Takahashi later made enemies when he attempted to cut military expenditures to reduce inflation. When military officers revolted during the so-called Feb. 26 Incident in 1936, they assassinated Takahashi along with other top officials.

“The policies that Korekiyo Takahashi took were abnormal, but he was at heart someone who wanted to rebuild Japan’s finances,” former Finance Minister Hirohisa Fujii said in December 2009.