Here’s the solution to all the world’s economic problems. Have governments issue debt, have central banks buy it, and then have the governments repudiate it. What could go wrong? From Enda Curran and James Mayger at bloomberg.com:
Japan for years has been renowned for having the world’s largest government debt load. No longer.
That’s if you consider how the effective public borrowing burden is plunging — by one estimate as much as the equivalent of 15 percentage points of gross domestic product a year, putting it on track toward a more manageable level.
Accounting for the Bank of Japan’s unprecedented government bond buying from private investors, which some economists call “monetization” of the debt, alters the picture. Though the bond liabilities remain on the government’s balance sheet, because they aren’t held by the private sector any more they’re effectively irrelevant, according to a number of analysts looking at the shift.
While Japan’s estimated gross government debt is now over twice the size of the economy, according to Schulz’s calculations using BOJ data, the shuffle of holdings from private actors like banks and households to the central bank is having a big impact. It means debt in private hands will fall to about 100 percent of GDP in two to three years, from 177 percent just before Prime Minister Shinzo Abe took power in late 2012, he estimates.
Sales Tax
It’s not like Japan is slowing down on borrowing. Abe’s administration is now laying the groundwork for another burst of fiscal stimulus, which could be funded by selling bonds. He also announced Wednesday a delay to a sales tax hike planned for April 2017, rebuffing fiscal hawks who argued it was vital to raise revenue. Finance Minister Taro Aso explained Tuesday that “the biggest problem is that private consumption hasn’t risen,” making now not a good time to raise the levy.
Helping improve household sentiment could be one reason for making it explicit that at least some of the government bonds in the BOJ’s holdings will be written off. If Japanese consumers understand they’re not on the hook for all the gross debt outstanding, their mood could potentially perk up.
‘Permanently Monetized’
“I do not believe that there is any credible scenario in which Japanese government debt can be repaid in the normal sense of the word repay,” said Adair Turner, chairman of the Institute for New Economic Thinking and a former head of Britain’s financial regulator. “It would therefore be useful to make clear to the Japanese people that the public debt does not all have to be repaid, since some of it can be permanently monetized by the Bank of Japan.”
Another option touted by some economists is to have the BOJ convert a portion of its holdings into perpetual zero-interest government bonds. Japanese authorities already have embraced other unorthodox moves, including negative interest rates, central bank purchases of stocks and real-estate investment trusts and a welter of programs to bolster lending.
For now, there’s no sign from policy makers that they are willing to take a step closer to full-bore debt monetization. As a veteran of the fiscal-discipline focused Ministry of Finance, BOJ Governor Haruhiko Kuroda would probably never endorse such a plan, according to Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. Kuroda has a little less than two years left in his current term.
To continue reading: Japan’s Debt Burden Is Quietly Falling the Most in the World
