Japan's Dual Currency Proposal: A Slippery Slope

As was pointed out in a February 7 Seeking Alpha blog titled "Dual Currency Plans Being Examined in Japan" post by Edward Hugh (who was quoting a Financial Times article) there is discussion underway, supposedly among some "influential" members of Japan's Liberal Democratic Party, to print some JPY50 trillion of government (as opposed to Bank of Japan) notes. The FT article attributed such discussions to desperation in the LDP over the country's failing economy.

It is interesting to note that one of the LDP members, Mr. Yoshihide Suga, is deputy chairman of the LDP's election strategy council, which says a lot about what his priorities are regarding such a proposal. Everyone within the LDP, and particularly the younger members, have a sense of crisis regarding the upcoming Lower House elections in September of this year, given Prime Minister Taro Aso's record low voter ratings and the fact that the LDP and the Aso Administration is spinning their wheels on introducing economic countermeasures to fix a Japanese economy that is in serious trouble because of political gridlock.

Chief Cabinet Secretary Takeo Kawamura's response to the proposals was that such note issues would "lead to inflation and weaken the yen against other currencies", while BOJ Governor Masaaki Shirokawa huffed that such a move would "cause great damage to the BOJ's balance sheet and monetary policy as well as market confidence in the yen, in addition to potentially causing interst rates to jump". Excuse me? I don't think either gentleman was listening to Mr. Suga's comments, which were to wit, (we) "have to do something to undermine the central bank and the government's credibility or else we won't be able to halt the yen's rise".

At first, it is tempting to dismiss such proposals as yet another trial balloon by some wacky politician more concerned about getting elected than in really fixing Japan's economy. But Nobel laureate Joseph Stiglitz has reportedly been advocating such measures for a long time, while Osaka University professor emeritus Haruki Niwa and other intellectuals in Japan have been advocating just such a policy for the past decade. Government notes were also issued during FDR's "New Deal" to combat the Great Depression in the 1930s.

Proponents of government note issues maintain that it takes out the middleman, i.e., an intransient Bank of Japan in this case. Procuring significant funds for economic stimulus in the usual manner involves the issuance of government debt, which Japan is already awash in (nominal deb-to-GDP ratio is some 175% and rising fast). Even if the Bank of Japan used its balance sheet by issuing new bank notes and buying the bond issue itself, the funds transferred to the government are net of the BOJ's expenses. The Bank of Japan is after all a stock company whose stock trades on the Japanese exchanges, and whose shares can even be bought by foreign investors if they fill out the proper paperwork.

However, such an action in the hands of undisciplined politicians could put Japan on the slippery slope to a Weimar Republic-like scenario. Why not first use the JPY40 trillion or so of "hidden treasure" funds lying around in a number of special accounts that are effectively cookie jars for various government bureaucracies, as some other LDP politicians have suggested? The gains on special reserves that are the legacy of Japan's old Fiscal Investment and Loan Program (the source of funds for the infamous bridges to nowhere during Japan's Heisei Malaise) are believed to be around JPY40 trillion, which is almost as large as the JPY50 trillion government note issue being bandied about.

Disclosure: None.

Comments

[Firat Ünlü:]

Terrible proposal, you only need to look at the most recent 'stimulus spending' to see how disastrously allocated it had been. Why does none of these Keynesians EVER look at the debt side?

You can cheat your maths teachers but not maths principles.

Feb 10 06:04 AM

[William L. ...:]

Thanks for your article. This is an unbelievable proposal.

Feb 10 09:05 AM

[Lok Sang Ho:]

The proposal is not so horrible as your readers have it. I have been advocating that the Bank of Japan intervene aggressively to stop the Yen's relentless and destructive rise, which is hurting everybody in the real economy. Such sales of new issues of Yen is just to quench the appetite of the Yen buyers and in and of themselves are not inflationary, unless the Yen declines excessively. But then if the Yen does decline excessively the Bank of Japan can always buy them back with its huge holdings of US dollars. Comparing this strategy to a Weimar Republic-like scenario misses the point because the new money is not used by the government to compete for scarce goods with honest citizens who buy with their hard-earned money.

Feb 10 11:11 AM

[Queen Isabelle:]

Issuing a new Japanese currency while shutting down the Central Bank of Japan would be a brilliant move in restoring Japan's fiscal and economic security.

Abraham Lincoln successfully printed Greenback dollars, which undercut the control of Europe's Illuminati bankers. That is widely thought to be the true reason why he was assassinated.

The US should likewise, shut down and audit the Federal Reserve bank and convert back to Greenbacks.

Feb 10 07:03 PM