Week 11

Hello, this week we will be covering the BOJs response to the covid 19 pandemic.

Since the early 1990s Japan has been learning how to deal with a new and unique set of macroeconomic circumstances. Japan is a developed nation dealing with a decreasing population and uncertainty over its own ability to grow the economy. From an outsider’s view, the last 30 years of Bank of Japan (BOJ) policy might look more like maintenance than expansion. In many ways the BOJ has operated as an unwilling example against the macroeconomic mainstream, they have consistently approached issues from the same school of thought that the US does while ending up with results that prove to be unwanted.

As of 2022, Japan’s debt to GDP ratio has crossed 260%, a staggering number that for many would spark fear that the government has overspent and flooded the market with yen. However, Japan is instead dealing with many of the issues one would expect of a government that refuses to spend. The BOJ has been consistently fighting against deflation for decades. Japan has kept interest rates at or around 0%. There has been no hyperinflation or mass economic crash as had been previously predicted by American economists like Paul Krugman. Instead, Japan has seen relative stability which while lacking the growth that would be typically associated with success allows Japan the ability to carry forward as a strong developed economy. To this one might easily assume that the Japanese government has adopted a worldview with an understanding of MMT and has used that to help maintain and bolster their economy. While much of Japanese economic policy is averse to the advice given by many in the West they themselves would deny any appreciation or understanding of MMT as being part of their policy-making framework. Taro Aso, the Japanese Finance Minister, described MMT as “an extreme idea and very dangerous.” The perception of MMT as dangerous comes from the fear that any understanding of MMT allows the government to freely spend without repercussions. This fear is misplaced in its misunderstanding that MMT serves as a general policy for the government, Japan can’t ‘follow MMT’ Japan as a sovereign issuer of a fiat currency operates a currency that will always be a form of modern money. Japan does not want to allow anyone to believe they ‘adhere’ to MMT because they likely believe it opens them up to great risk. My mentor on this project, Bill Mitchell, referred me to a quote from Paul Samuelson, one of the most legendary American economists, in which he says “I think there is an element of truth in the view that the superstition that the budget must be balanced at all times … Once it is debunked takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have … anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that long-run civilized life requires.” Effectively what Samuelson is saying is that the concept of a balanced federal budget is a necessary myth so that the general public does not become too needy. A lie designed to protect the interests of those in control, and yet it is a falsehood that is disproven annually by governments around the world. Samuelson is admitting that the government has the resources and fiscal capability to do far more than what it currently achieves and yet chose not to. When the government says they don’t ‘adhere’ to MMT it’s not a lack of understanding rather a public choice that is designed to keep the interests they deem valuable at heart. 

It is important to keep all of this in mind when evaluating the choices made by the Bank of Japan during and after the Covid-19 Pandemic. The Bank of Japan is aggressive in pushing forward policy, but not emboldened enough to fully challenge the macroeconomic status quo. The Bank of Japan will make policy decisions that may seem irregular, but they will bend for fear of being perceived as extremist or outside the box. They approach issues with the same end goal in thought as the United States yet they do not use the same methods. The BOJ used a four pronged attack in tackling the impacts of the Covid-19 Pandemic. The four key strategies they used were a loan program similar to the US PPP program to ensure businesses remained solvent, a bond purchasing program to free up money in the Japanese economy, currency purchases to ensure price stabilization and the mass purchases of ETFs covering the Tokyo Stock Exchange to help maintain stock price stability.

Japan’s loan program far outspent the United States when you compare for relative percent of GDP. The American PPP program loaned out 857.92 Billion compared to a 21.02 Trillion GDP about 4% of US GDP. The European Central Bank’s loan program landed at about 12% of Eurozone GDP, the BOJs program ended up at 18% of GDP. The bond purchases that occurred regularly after the pandemic were in the hundreds of billions of yen, they helped to free up money in the Japanese economy. Bonds typically have long maturity periods and by outright purchasing them the Japanese government put more currency into the economy helping to counter the slowed-down economy. The BOJ additionally purchased $475 billion worth of ETFs in the Tokyo Stock Exchange which in the midst of an unprecedented economic event helped to stabilize stock prices and lower public concern. This sum of ETF purchases works out to nearly 10% of the Tokyo Stock Exchange and helped to ensure price stability. It has been a key driver in 9.7% growth of the exchange which comes as a staggering number in Japan, a country where fiscal growth is few and far between. However, these purchases pose a dangerous decision of choosing to offload or maintain the holdings. If the BOJ sells off the holdings, or transfers them to pension funds or other government programs as has been suggested they risk causing serious damage to the market. If they maintain the holdings they are accepting their inability to use the spent yen, however, they may benefit Japanese corporations because the price increases caused by the government purchases have been largely intended to encourage Japanese companies to take further risks in order to bolster the economy. Japan is notorious for its risk-averse culture when it comes to the economy. The only similar example of this action on such a scale comes from Hong Kong in 1998 when currency speculators attempted to put pressure on the Hong Dong Dollar yet were fought off when the government purchased large portions of the stock exchange to help boost prices. Price stability helped to prevent an economic collapse yet left the government holding a sum of ETFs with no use. To get rid of them the government made arrangements where natives of Hong Kong could buy the ETFs at a five percent discount on the original purchase price. At the time the decision to purchase ETFs was entirely unprecedented. The Federal Reserve took similar action but only $8.7 Billion dollars which is even more minimal when comparing the size of TYO and the NYSE. 

After the core of the pandemic was over, the downstream inflationary effects of high government spending combined with supply chain issues hit the world. The BOJ bought 2.8 trillion and 6.3 trillion yen respectively in October 2022 helping to pull yen out of the economy in a time of inflation, these measures helped to ensure that Japanese inflation remained below that of the US and the EU (The EU was simultaneously dealing with the energy crisis caused by the Russian invasion of Ukraine). Additionally, these measures served to help the BOJ maintain the devaluation of the Yen. In the time after the pandemic, the BOJ has begun to attempt a new strategy, devaluing the yen to bring in foreign investment, hoping to induce a positive output gap in order to create new economic growth. They have accomplished this by maintaining low interest rates relative to the US driving people to hold more USD and less yen. This change in relative interest rates has allowed Japan to take advantage of increased tourism and investment. Through the increase in capital entering the Japanese markets they have successfully maintained an inflation rate above two percent, the standard for healthy inflation, for the past two years. Yet, despite this Japan is not thriving economically.

The Japanese market has faced wide instability over the past thirty years. They have established an economic market with longstanding hostility towards risk-taking and expansion. They have embraced American macroeconomic decision making without the willing cynicism that is required for it to be successful. The Fed operates a system built to produce beneficial measurables by enhancing the economic benefit of the country’s elite. The BOJ operates in a country willing to invest in its social and physical infrastructure, not one that makes decisions based on its elite solely. For these reasons when the Bank of Japan finally gathered the strength to bring more capital into the Japanese market over the past two years, they failed to create success. Japan has seen real wages decrease each month for the past two years, why? Because corporations are too afraid to pursue growth or accept risk in an economy that has been trained on instability. You can not have growth if Japan falls back into another era of deflation. 

Thank you for reading and I hope to see you at my presentation.