Monetizing Public Debt in Japan: An Empirical Critique of Modern Money Theory

Abstract

Is Japan really a ‘success’ case that supports the Modern Money Theory (MMT) framework? The Bank of Japan (BOJ), the country’s central bank, has conducted more aggressive monetary quantitative easing since April 2013, which could effectively allow the Japanese government to monetize its cheaper public borrowing. This paper argues that the economic and financial situations in Japan have provided little support for the MMT view, for these reasons: (i) The huge issuance of public debt by the government and the large-scale supply of monetary base by the BOJ did not create enough new money required to revive the economy as a whole, contrary to the MMT view that the issuance of sovereign currency can easily achieve full employment. (ii) It is difficult for Japan’s monetary authority to manage the government bonds market under the multicurrency-based shadow banking system, opposed to the MMT hypothesis that purchasing government bonds is discretionally determined by monetary authorities without a financial constraint. (iii) The monetization of public debt backed by the BOJ, which MMT regards as an example of success, could lead to a perverse outcome–the buildup of financial fragility in the real estate market. In conclusion, the monetization of Japan’s public debt, applauded by MMT advocates, would leave the burden of the vast costs of its failure to our children in the future.