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JGB binge steering Japan toward crisis: experts

BOJ’s easing said unsustainable

by

Staff Writer

This is the second story of a four-part series on evaluating Prime Minister Shinzo Abe’s namesake economic program, backed by the aggressive monetary-easing by the Bank of Japan.


The launch of aggressive monetary easing by the Bank of Japan stunned financial markets two years ago.

But is it still sustainable? If not, how long can it continue?

The main component of BOJ Gov. Haruhiko Kuroda’s monetary easing is the massive purchases of long-term Japanese government bonds from financial institutions. Experts interviewed recently by The Japan Times said Kuroda won’t be able to maintain this tactic for long.

According to a simulation by Mizuho Research Institute Ltd., the BOJ will probably be forced to stop its “qualitative and quantitative easing” policy by 2020 because the central bank will have bought up most of the long-term JGBs now held by banks.

If the BOJ continues buying government bonds at its current pace of ¥8 trillion to ¥12 trillion a month, the central bank will by 2020 hold more than 80 percent of all outstanding JGBs with a remaining maturity of 10 years or less, according to the institute.

This will make it difficult for the central bank to buy any more because banks need to keep a certain amount of them as collateral for various transactions, said Hajime Takata, chief economist at Mizuho Research Institute.

Takata himself believes Kuroda’s drastic easing plan, which helped lower the yen’s value, benefited exporters and boosted stock prices, was necessary to end Japan’s long-entrenched deflation and “buy time” for the economy to improve.

By the late 2010s, the debt-ridden government will be pushed to carry out drastic structural reforms to raise Japan’s growth potential and improve its own fiscal soundness at the same time, Takata said.

“The BOJ has used such a powerful anesthetic to make the financial market feel no pain. But you can’t keep (the financial market) anesthetized forever,” Takata said.

Izuru Kato, a BOJ watcher and chief economist at Totan Research Co., warned that the monetary easing has actually eliminated key incentives for the government to carry out painful economic reforms.

The BOJ’s massive buying of JGBs has pushed down long-term interest rates, making it easy for the debt-ridden government to keep issuing even more bonds to finance itself despite its snowballing debt, Kato noted.

Japan is saddled with a surging public debt that has exceeded 230 percent of gross domestic product — the worst among the developed countries.

Under normal circumstances, such a debt-ridden government would see a spike in long-term interest rates and would find it difficult to borrow more money by issuing bonds.

But the yield of the benchmark 10-year JGB, a typical indicator of long-term interest rates, now stands at around 0.35 percent, which looks unnaturally low given Japan’s staggeringly large and rapidly swelling debt, experts said.

“The function of the financial market has broken down because the BOJ has kept buying massive amounts of government bonds and kept interest rates artificially low,” Kato said.

“Japan is the most indebted country (among advanced nations) in comparison to the size of its economy, but neither politicians nor the people are trying hard to rebuild its fiscal soundness” because of low interest rates, he said.

Kato also pointed out that if its JGB-buying operations continue, the size of the BOJ’s assets — most of which are government bonds — will exceed that of Japan’s gross domestic product in 2017 — an alarming level that could seriously erode confidence in the central bank and Japan’s entire financial system.

“(The BOJ) has already crossed the Rubicon. Japan should not have started this (monetary-easing), but once started, we need to consider how we can achieve a soft landing,” Kato said.

If market participants start believing the BOJ or Japanese government are no longer capable of managing the public debt, this could cause long-term interest rates to spike and trigger a fiscal and financial crisis in Japan.

According to a simulation by economist Yukio Noguchi, an adviser to the Institute of Financial Studies of Waseda University in Tokyo, if the average yield of outstanding government bonds surges to 4 percent from the current 1.18 percent, it would increase the central government’s interest payments to a staggering ¥78.1 trillion in fiscal 2025 alone, which is equivalent to 80 percent of the government’s current general account.

Noguchi calls this “a nightmare scenario” in his book published last year.

“This means nothing other than fiscal bankruptcy,” Noguchi wrote.

“(The current operations of the BOJ) cannot be maintained forever. It will go bust at some point, but you can’t tell when,” Noguchi said in a recent interview.

By buying trillions of yen in government bonds from banks every month, the BOJ has kept increasing the value at banks’ current accounts at the central bank, hoping it will somehow spark inflation and thereby reinvigorate the whole economy.

But due to an apparent lack of fund demand in the economy, banks have only ended up increasing the balance of their own current accounts, not using them to increase loans to businesses and expand the economy, Noguchi said.

“Monetary easing is not working. It has not increased money stock (of non-financial sectors) much,” Noguchi said.

Kuroda’s aggressive easing has only fueled market speculation by helping push down the yen’s value, while greatly increasing the risk of a catastrophic fiscal and financial crisis in the future, he said.

  • Richard Solomon

    This is the latest of a number of articles and/or op-ed pieces which have noted that the BOJ policies cannot continue forever. Some are more strident than others about two relevant factors. First, banks are not loaning money out to businesses at a sufficiently active rate to boost the economy. Second, PM Abe has yet to really initiate many of his so called ‘structural reforms.’ His ‘third arrow’ has sat unused in his quiver because he is more focused on ‘reinterpreting the Constitution’ and restoring Japan’s historical greatness. Also, because he is probably fearful of upsetting large corporations and big banks with more aggressive reforms that might cause them to actually change how they function.

    As has been seen in the USA, monetary easing can help an economy to some extent. But comprehensive and substantial recovery with wage growth for the average worker has not happened because there have not been enough stimulative programs and structural reforms of the economy. The Republican Congress has blocked those kinds of efforts in order to benefit/protect the upper 1% of the population and the large banks/corporations.

  • Nelson

    Huh? I don’t see the problem here. If the Bank of Japan buys 80% of the Japanese government bonds by 2020 then who cares if the interest rates go up in 2025? The government may have to pay the interest on the bonds but then by law the Bank of Japan must return the paid interest back to the Japanese government. So there’s no real downside here for now.

    In fact, since Japan is facing deflation once again, the Bank of Japan should buy more bonds directly from the government and inject more money into the economy. At least until we see 2% inflation again.

    If the living standards of ordinary people are not improving, then spend the money to build more things. There should still be lots of infrastructure investments necessary in Tohoku (it’s only been 4 years after that earthquake and there still are temporary housing). Construction workers will get paid more and they can then spend that money on food or clothes or other things and get the economy rolling again.