UK Telegraph: Japan Mulls Monetization of Debt, Yen Devaluation

The true believer of Keynesianism sallies forth to where no other developed country has gone before. (Not after the World War II, that is.)

UK Telegraph's Ambrose Evans-Pritchard reports that the Democratic Party of Japan (DPJ) has drafted a bill that will require the Bank of Japan to monetize the government debt, set the "inflation target" at 2%, and devalue Japanese yen by 30%. And they call it a radical thinking.

Japan mulls monetisation of public debt and yen devaluation
(Ambrose Evans-Pritchard, 4/14/2010 Telegraph)

"A draft by 130 lawmakers from premier Yukio Hatoyama’s Democratic Party of Japan said the country needs a radical shift towards growth policies, calling for an inflation target above 2pc. The exchange rate should be steered to ¥120 against the dollar, from the current ¥90.

"Shizuka Kamei, financial affairs minister [and former policeman], said the central bank must monetise government debt to support the market for state bonds and prevent deflation becoming deeply lodged in the economy.

"The Bank of Japan’s governor, Masaaki Shirakawa, told lawmakers that it would illegal [sic] to fund state spending by printing money. “History has proven that central banks directly buying government securities caused severe inflation and dealt a blow to the economy. The BoJ is now providing adequate funds,” he said." [The article continues.]

The BoJ governor is right. This is crazy.

Japan's industrial output is on the upswing, so is the housing market. Stronger economies in Asia are revaluing their currencies upward against the basket of major currencies (China, Singapore). And Japan wants to debase their currency to cause inflation.

As if inflation is the sign of strength. Japan may not have had a significant inflation in its lost two decades, but it hasn't really had a significant deflation either. Monetary base has been stable, and price of goods and services has been stable. However, since the government takes away more from its citizens - increased taxes, increased national health care insurance premiums that hit pensioners particularly hard, the average Japanese do not have a sense that they are enjoying extra purchasing power.

The so-called "structural reform" by the previous administration under Prime Minister Koizumi has all but destroyed the employment safety net. Japanese saving rate has plummeted from high teens to low single digits, not because of higher spending but because of lower income. Now the Hatoyama administration wants to further destroy the savings (or what's left of them) of the citizens by debauching the currency intentionally.

Ever patient and philosophical, the Japanese would probably say "Shoganai (nothing we can do about it)" and accept their lot.

I hope they are buying gold and silver while yen is still strong.

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