Assassinated Depression-Era Japan Finance Chief Invoked in Rebuild Debate
Bank of Japan Governor Masaaki Shirakawa is under fire for refusing to consider 1930s-style purchases of government bonds to fund reconstruction from the nation’s record earthquake.
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 parliamentary fiscal and finance committee hearings.
“If this isn’t a special situation, what is?” Kozo Yamamoto, a Diet member with the opposition Liberal Democratic Party, said in an interview this week. Yamamoto advocated a 20 trillion yen ($247 billion) 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 DPJ 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 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.
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.
“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 by 34 percent in the 1932 fiscal year, financing it by doubling bond issuance, according to a report by the Japan Center for Economic Research. While the effort helped end deflation, much of the outlays were used for the military, and Takahashi made enemies when he later attempted to rein in inflation. He was assassinated in 1936.
“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 the economy, as has happened in the past, Shirakawa said three days ago.
Mikishi Daimon, a legislator of Japan’s Communist Party, asked Shirakawa to explain the BOJ’s policy in the era of Takahashi at the Diet today. Shirakawa said the central bank took the step in the 1930s because the debt market was “very immature,” whereas it is now “able to absorb bond issuance smoothly even after the earthquake.”
Benchmark 10-year government bonds yielded 1.22 percent as of 3:45 p.m. in Tokyo, down 7.5 basis points, or 0.075 percentage point, since the March 11 magnitude-9 temblor and ensuing tsunami devastated the northeast of the nation. Prime Minister Naoto Kan’s government said two days ago that the damage amounted to as much as 25 trillion yen.
Noda said yesterday 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 that the finance ministry projected in January would increase to a record 997.7 trillion yen in the year starting April 1.
Shinichiro Furumoto, the director general of the DPJ’s tax committee, has floated a 1 percentage point increase in the consumption tax.
“Japan’s fiscal situation means the government can’t increase spending for reconstruction without being clear about how to fund them,” said Takero Doi, a professor of economics at Keio University in Tokyo and a member of an advisory panel to the Ministry of Finance.
Raising Japan’s income tax may be the best option, Doi said. An increase in the 5 percent national sales tax should be reserved for social-security costs dealing with the country’s aging population, while the corporate tax shouldn’t be lifted because Japan’s levy is already the second highest among developed nations, he said.
Australia is also considering taxes to pay for its rebuilding efforts after floods and a cyclone hit the state of Queensland, with Prime Minister Julia Gillard proposing a A$1.8 billion ($1.8 billion) levy.
Hit to Growth
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.
Government figures today showed deflation remained in place before the temblor. Consumer prices excluding fresh food fell for the 24th straight month in February, by 0.3 percent from a year earlier, the statistics bureau said.
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.
The BOJ has purchased JGBs through the secondary market, and includes the securities in its 10 trillion yen asset- purchase plans. The Fed and ECB’s programs are also done through the secondary market.
Under Takahashi’s initiative, the BOJ’s underwriting continued for 14 years until the end of World War II, with the ratio of bonds bought by the central bank peaking in 1933 at 89.6 percent, according to a 2001 paper by the central bank.
Today, the Bank of Japan has a self-imposed rule of not holding more JGBs in its portfolio than banknotes outstanding. Shirakawa today said the BOJ is “currently buying a large amount of government bonds” to offer abundant cash to financial markets.