This is somewhat old information but surely illustrates what Japan thinks of quantitative easing. The following is a video of the Japanese financial minister Taro Aso in 2010 explaining why Japan’s huge public debt is not a problem:
In this video, Mr Aso asserts that Japan will not go bankrupt despite the huge public debt because debt monetization will clear all of it. This was when the Liberal Democratic Party was not ruling the parliament, and thus he was perhaps more frank to talk about what he actually thinks of the debt.
The myth of the debt
Let us review his speech. He starts with denying the possibility of a sovereign debt crisis in Japan.
There is a myth that newspapers falsely spread and as a consequence many people believe: Japan cannot avoid to go bankrupt.
There have been debates about how Japan’s public debt of more than 200% of GDP can be coped with. No equivalent example of such a huge debt of an advanced economy could be found in history except during the war. There are some people who suggest the possibility of bankruptcy, but Mr Aso clearly denies it.
How could that be avoidable? He asserts it is because the lenders are Japanese citizens.
It is not you (Japanese citizens) that are borrowing. It is the Japanese government that is borrowing. If there is somebody borrowing 100, there must be one who is lending 100, as the two sides of a balance sheet have to be equal. If the government is borrowing 100, who is lending? Yes, Japanese citizens.
The public debt to compensate for the weak private demand
Then, why does the Japanese government have to borrow? Mr Aso says it is because of the weak private demand for money.
Nobody is borrowing money. Banks would go bankrupt if nobody is borrowing although many are saving. Annually, there are 30 trillion yens that must be borrowed. If nobody was borrowing, 30 trillion would be a deflationary force. So the government is borrowing.
He advocates the public debt is for the public investment that should compensate for the lack of demand in the private sector. This Keynesian idea actually corresponds with Dr Larry Summers’ theory of secular stagnation.
Low inflation and low growth are not specific to the Japanese economy but a common trend in the advanced economies, and consequently a huge amount of debt is also common worldwide.
The meaning of the debt in your own currency
Why does he think bankruptcy is avoidable when citizens are the lenders? Mr Aso points out that the debt is issued in the local currency.
You (Japanese citizens) are lending in the yen. The government is borrowing in the yen. 94% of the public debt is borrowed from the Japanese. The rest of 6% is from foreigners, but it is also in the yen.
If the debt is issued in the local currency, what happens when the maturity date comes? He continues.
If the debt is in the yen, what should we do upon the maturity? The borrower is the Japanese government, so the Japanese government will just print the yen. Because it’s the Japanese yen. It is very simple. If you pay back in a foreign currency, you have to exchange to the dollar or the euro. It is the case with Greece. Yet we are different.
This is indeed a very frank declaration of debt monetization, is it not? He cannot explicitly say this at the moment, because he is now a financial minister, but this is what underlies the Japanese monetary policy.
Debt monetization ongoing
Monetization is already in progress. The Bank of Japan is buying the government bonds, and thus the yields on them that are paid from the government to the central bank will be eventually paid back from the central bank to the government.
Negative interest rates are also an attempt to benefit the government. A famed bond investor Bill Gross said on Twitter that negative interest rates are more fiscal than monetary.
The huge debt is a result of secular stagnation, and the situation is somehow the same in all the advanced economies. Where will it ultimately lead to? All we know is that we cannot stop easing, for growth and for the debt, and it will boost the gold price.