Japan's Debate: How to Fund the Cleanup

When politicians in Tokyo start talking about Depression-era monetary policies, it's clearly not business as usual in the Japanese Diet. Rebuilding quake-destroyed homes, roads, and ports, not to mention cleaning up radiation leaks from the still-crippled Fukushima Dai-Ichi nuclear plant, will require a 20 trillion yen ($235 billion) reconstruction package, say lawmakers from Prime Minister Naoto Kan's Democratic Party of Japan and the opposition Liberal Democratic Party. The trick is how best to fund it without crippling a Japanese economy that even before the earthquake had been coping with deflation, weak domestic demand, and the world's biggest government debt load.

That's why Bank of Japan Governor Masaaki Shirakawa, the country's guardian of sound money since 2008, has one of the toughest jobs in central banking right now. He's resisting a proposal submitted by a group of ruling party legislators to Finance Minister Yoshihiko Noda on Mar. 18 calling for the BOJ to buy government debt directly, according to a blog posting by DPJ member Yoichi Kaneko. The group claims this radical policy worked in the 1930s. "Bank of Japan bond underwriting is a policy that is evaluated highly worldwide because it helped Japan recover from the Great Depression before others," the Kaneko group's proposal says. These lawmakers also support a 20 trillion yen special reconstruction budget, which the Diet will consider in coming weeks.