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Former Fed Chairman May Have Given Japan the Answer to Its Debt Problems

Interest-Rates / Global Debt Crisis 2016 Aug 01, 2016 - 02:32 PM GMT

By: John_Mauldin


Japan just had its national elections. Voters there do not share the anti-establishment fever that grips the rest of the developed world. They gave Prime Minister Shinzo Abe and his allies a solid parliamentary majority. Japanese are either happy with Abenomics or see no better option.

Abe may now have the backing he needs to change Japan’s constitution and its official pacifism policy. This would be less a sign of nationalism than a new economic stimulus tool. Defense spending is expected to more than double. This will give a big boost to Japan’s shipyards, vehicle manufacturing, and electronics industries.

The bond market is too small for the BOJ

The Bank of Japan's negative-rate policy and massive bond-buying operation will now continue full force and may even grow. Whether the program works or not is almost beside the point. It shows the government is “doing something” and suppresses the current symptoms of economic malaise.

The Bank of Japan is the Japanese bond market. It’s buying everything that comes available. This year it will need to cough up an extra ¥40 trillion ($400 billion) just to make its purchase target, let alone increase its quantitative easing in the desperate attempt to drive up inflation.

But here’s what’s happening. Foreign speculators are becoming some of the largest holders of Japanese bonds. Many Japanese pension funds and other institutions are required to hold those bonds, so they aren’t selling. The irony is that the government is producing only about half the quantity of bonds the Bank of Japan wants to buy.

Sometime this year the BOJ is going to have to do something differently. The question is, what?

How the BOJ might get rid of the debt problem

For you conspiracy theorists, please note that “Helicopter Ben” Bernanke was just in Japan. He held private meetings with both Prime Minister Abe and Kuroda, who heads the Bank of Japan.

There is a limited availability of bonds for the BOJ to buy.  Plus, it already bought a significant chunk of equities and other nontraditional holdings for a central bank. So what are its other options?

Perhaps Japan could authorize the BOJ to issue very-low-interest perpetual bonds to take on a large portion of the Japanese debt. That option has been a topic of discussion.

It’s not exactly clear how you get people to give up their current debt when they don’t want to. Maybe the BOJ just forces them to swap out their old bonds for the new perpetual bonds.

This debt would be on the balance sheet of the Bank of Japan and not counted as government debt. That’s one way to get rid of your debt problem. But that doesn’t give Abe and Kuroda the inflation they want.

The one country that could lead the way in actually experimenting with a big old helicopter drop of money into individual pockets is Japan. And Ben was just there…

This bear is watching. 

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