The BOJ against “unstoppable” direct finance after the 2011 earthquake, according to the minutes


The head of the Bank of Japan in 2011 sounded the alarm over the idea of ​​taking out Japanese government bonds to support reconstruction after the devastating earthquake and tsunami that year, saying that a such a practice would eventually become “unstoppable”, the minutes said on Friday.

Masaaki Shirakawa, who was governor of the BOJ, warned that the central bank directly financing government spending would risk a sharp rise in inflation and undermine fiscal discipline, citing Japan’s past experience decades earlier, according to the minutes of a political meeting of April 6 and 7, 2011.

Realizing the danger of resorting to debt financing, even as a “temporary” step, Shirakawa said in retrospect: “The underwriting (of the public debt) began as such, as it was deemed convenient. But because of this, it became unstoppable and led to a sharp depreciation of the currency or to inflation, ”the minutes showed.

The governor’s warning came as lawmakers in the ruling party pitched the idea that the BOJ should come to the aid by guaranteeing public debt in the wake of disasters that required massive spending.

Japan had debt more than double the size of the economy in 2011 and the situation remains the same today. The country’s law prohibits the BOJ from directly funding the government.

Under current Governor Haruhiko Kuroda, who took over from Shirakawa in 2013, the BOJ has engulfed massive amounts of public debt in recent years via the market.

At the same meeting in April 2011, another member said the BoJ should continue to make it clear that debt monetization will “never be an option”, noting that the public will suffer from inflation. Shirakawa repeatedly rejected the possibility of guaranteeing public debt in subsequent public remarks.

Japan had had a bitter experience decades earlier. In the 1930s, then Finance Minister Korekiyo Takahashi advocated increased budget spending after the country was hit by severe deflation, urging the BOJ to underwrite public debt. Debt held by the BOJ grew at the same rate as war-related spending, paving the way for inflation in the post-war era.

The full minutes of the BOJ’s policy-making meetings in the months following the disasters of March 11, 2011 reveal how the central bank struggled to provide enough liquidity to calm market nervousness and prevent deterioration in business and consumer confidence.

The BOJ reacted quickly to the crisis at a political meeting on March 14, 2011, expanding its program to buy government bonds and risky assets like exchange-traded funds by 5,000 billion yen ( 45 billion yen) to 10,000 billion yen.

The 9.0-magnitude earthquake and subsequent tsunami affected large areas of northeastern Japan, killing some 22,000 or missing and causing collapses at the Fukushima plant in the worst nuclear crisis since Chernobyl. The calamity has disrupted supply chains, dealing a serious blow to manufacturers like Toyota Motor Corp.

This sparked massive sell-offs of Japanese equities and pushed the yen to a new post-war high of 76.25 yen against the then US dollar, prompting coordinated foreign exchange interventions on March 18, 2011 by the United States. central banks of industrialized countries of the Group of Seven nations to weaken the Japanese currency.

At the March 14 meeting, one board member said this step was essential to prevent sentiment from deteriorating “at all costs” and another stressed the need to focus more on risky assets. while monitoring “volatile” stocks and movements in the currency market.

Shirakawa told the meeting that the BOJ’s easing should be interpreted as a “preventative” measure to avoid heightened risk aversion and fears of harming economic activity.

“We have to make sure that our own action does not give the impression that reality is so serious (that the step has been taken) and inadvertently restrain economic activity,” he said in the minutes. .

The Japanese economy has since recovered from the 2011 earthquake, but is now on shaky ground amid the coronavirus pandemic. The Tokyo Olympics, July 23 through August 8, are supposed to show the country’s recovery from the disaster, but are overshadowed by the COVID-19 crisis.

After aggressive easing, the BOJ owns around 45% of government bonds and is now a major shareholder in Japanese equities thanks to ETF purchases that initially started under Shirakawa and rose sharply under Kuroda, the current one. governor.

The BOJ publishes more comprehensive minutes of political meetings a decade after they are held. The last batch covers meetings during the six months between January and June 2011.

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