Japan's 'Money Printing' Solution Poses Risks
TOKYO, Feb. 3 '99 (Reuters) - The idea of having Japan's central bank print money to help cover the nation's ballooning debt might appear to be a way out of Tokyo's economic policy bind, but critics say the move would have serious negative fallout.
"It risks lowering Japan from the division of sensible developed countries to the lower division of countries with bizarre, archaic financial structures," said Chris Calderwood, chief economist at Jardine Fleming Securities in Tokyo.
Pressure to have the Bank of Japan (BOJ) underwrite Japanese government bonds (JGBs) in the primary market -- a step now banned by law except in "extreme circumstances" -- is mounting as long-term interest rates jump on fears of a bond glut amid attempts by the government to spend its way out of recession.
Ruling Liberal Democratic Party (LDP) heavyweight Ichizo Ohara said on Tuesday he was proposing that the party take up the idea of having the BOJ directly underwrite at least five trillion yen ($44.6 billion) worth of JGBs over two years.
The head of a separate LDP panel said last week that his committee would consider the broad concept as a way to boost money supply and alleviate deflationary pressure on the economy.
The proposals echo similar suggestions by private economists, most prominently Massachusetts Institute of Technology professor Paul Krugman. Some analysts think U.S. Treasury officials are also in favour, though they note the Federal Reserve is banned from doing the same.
Economists and experts are sharply divided on the advisability of the step, but many agree it could open the door to unrestrained government spending on an unprecedented scale.
The danger is "if you do it once, you'll keep doing it and get into a very dangerous situation," said Brian Rose, an economist at Warburg Dillon Read in Tokyo.
"Having the central bank underwrite debt removes the limits on fiscal policy...it's a dangerous first step."
Japan's outstanding government debt is already set to hit 327 trillion yen at the end of the fiscal year to March 2000 and is expected to soar in the near term.
Worries about Japan's fiscal health were a key factor behind a decision by Moody's Investors Service to strip the nation of its top-notch Aaa rating last November, and economists said a move to "monetarise" that debt could prompt a further downgrade.
Vincent Truglia, head of Moody's sovereign risk group, said last week that the ratio of debt to gross domestic product could hit as high as 140 percent by 2003, far in excess of anything ever seen in an industrialised nation.
Shifting the burden of government debt to the BOJ's shoulders would also undermine the yen, although the currency market might react favourably in the short term on hopes the move would improve chances of economic recovery.
"If we attempted to force the BOJ to print money to purchase JGBs, that would undermine (fiscal) discipline and would go against the principle of making the Japanese yen one of the three major international currencies," Kosuke Nakahira, a former senior official at the Finance Ministry, told Reuters.
"That is a very important issue for Japan's long-term policy or strategy, particularly now that we have the euro as a potential international currency," Nakahira said. Japan has been touting the yen as a potential rival to the dollar and the euro and is intent on taking steps to help that happen.
That strategy aside, a sharp and sudden fall in the yen would renew pressure on other Asian countries to devalue their own currencies to compete in export markets and boost a Japanese trade surplus already at record highs and the source of growing trade friction with the United States, some analysts said.
Opening the monetary floodgates to finance government debt would also remove pressure on banks and corporations to take the tough but painful restructuring steps needed to restore profitability and long-term economic growth, critics said.
"The risk is that the public sector always comes up with a bit more and this forestalls restructuring and a sense of crisis," Calderwood said. "We need some strait-jacket to put on fiscal policy."
Central bankers are expected to try to resist the pressure out of concern for the BOJ's own balance sheet and credibility, but how successful that battle will be remains unclear.
Some in the LDP have come out against the idea, but Prime Minister Keizo Obuchi is clearly keen to restore economic growth in time for a Lower House election that must be held by mid-2000.
"The problem is that the alternative is to cut public spending and watch a million construction workers lose their jobs -- and then you (LDP politicians) lose the election," Warburg's Rose said. "It's all politically driven." ($1-112 yen)
Copyright © 1999 Reuters Limited
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