By Ambrose Evans-Pritchard Economics Last updated: August 9th, 2013
As you may have seen, Japan’s public debt has hit one trillion quadrillion yen. That is roughly $10 trillion. It will reach 247pc of GDP this year (IMF data).
No problem. Where there is a will, there is a solution to almost everything. Let the Bank of Japan buy a nice fat chunk of this debt, heap the certificates in a pile on Nichigin Dori St in Tokyo, and set fire to it. That part of the debt will simply disappear.
You could do it as an electronic accounting adjustment in ten seconds. Or if you want preserve appearances, you could switch the debt into zero-coupon bonds with a maturity of eternity, and leave them in a drawer for Martians to discover when Mankind is long gone.
Shocking, yes. Depraved, not really.
It also doable, and is in fact being done right before our eyes. That is what Abenomics is all about. It is what Takahashi Korekiyo did in the early 1930s, and it is what the Bank of England is likely to do here (while denying it), and the Fed may well do in America.
Japan’s QE will never be fully unwound. Nor should it be. If a country can eliminate a large chunk of unsustainable debt without setting off an inflation spiral, or a currency crash, or the bubonic plague, there has to be a very strong reason not to do it. I have yet hear such a reason. Though I have heard much tut-tutting, Austro-outrage, and a great deal of pedantry.
It is also what the Romans did time and again over the course of the late empire, though less efficiently, since they did indeed inflate. And no, even that was not fatal. The Roman Empire did not collapse because of metal debasement. It revived magnificently under the Antinones. As Gibbon discovered deep into his opus — and too late to change his title — the Decline and Fall of the Roman Empire took an awfully long time, to the point where the concept is meaningless.
Money is hugely important, but also ultimately trivial. The productive forces of a society are what matter in the end.
Japan’s current debt is roughly the same level as that reached by Britain after the Napoleonic Wars, though Britain produced half the world manufactured goods and controlled half the world’s shipping in the early 19th Century (or at least by 1840), so it had a bigger shock absorber.
Does Japan’s debt matter? Yes, of course it does. A country with a shrinking workforce and surging old-age costs, cannot bear such a load.
But let us be clear what it means. The IMF says “net debt” is about 140pc of GDP, and this is the relevant gauge. The rest is offset by the Bank of Japan’s holdings of US Treasuries, and its internal holdings of Japanese government debt (JGBs, etc).
These two charts from BNP Paribas are worth a look. They show the BoJ bond buying spree, and the curative effect of a whiff of inflation on the debt trajectory:
The BoJ is currently buying 70pc of the total state debt issuance each month, and my guess is that it will be buying over 100pc before long since the economic rebound will lead to a surge of tax revenues that greatly reduces the fiscal deficit. It will soon enough to be able to carry out some really worthwhile legerdemain.
Governor Haruhiko Kuroda cannot admit that the BoJ is now a financing arm of the Japanese finance ministry (as it was under Takahashi), or that the bank is systematically mopping up as much debt as it can get away with, while the going is good, never to be repaid. He cannot utter the word monetisation.
So far, he is getting away with it. Ryutaro Kono from BNP Paribas says it is remarkable the Japanese bond vigilantes have not reacted at all to reports that premier Shinzo Abe may delay or lessen the planned rise in VAT.
Mr Kono cites this as proof that “financial repression” has overwhelmed the bond market. The wild yield spikes we saw when Kuroda first took over have subsided. 10-year yields are 0.74pc, where they were before Abenomics began, and much lower in real terms, which is the key point for debt dynamics. The market is now crushed by overwhelming force, quiescent for now.
Is there a cost to this? Sure. It is an internal redistribution of wealth within Japanese society from creditors to debtors (debtors in this case being the state). It is an inter-generational transfer. Those retiring in five, ten, or fifteen years will be poorer: but the burden on those who are now young children will be less onerous.
That is a political choice for the Japanese people to make. But it does not mean — in itself — that Japan is is bankrupt. It just means that baby boomers will not be comfortable as they expected.
Could the whole experiment go horribly wrong? Will there come a moment when the bond vigilantes do wake up, and push yields much higher, setting off a crisis, requiring yet further financial repression, and probably capital controls.
Probably, yes. But what is absolutely certain is that Japan was heading for an almighty smash-up under the old BoJ policy of deflation, paralysis, and broken will. High debts and deflation are a calamitous mix.
Japan has to pick its poison. Abenomics is surely the sweeter brew.
