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Forum Post: The Myth That Japan Is Broke: The World's Largest "Debtor" Is Now the World's Largest Creditor

Posted 11 years ago on Sept. 9, 2012, 3:43 a.m. EST by LeoYo (5909)
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The Myth That Japan Is Broke: The World's Largest "Debtor" Is Now the World's Largest Creditor

Saturday, 08 September 2012 07:25 By Ellen Brown, Truthout | News Analysis


Japan's massive government debt conceals massive benefits for the Japanese people, with lessons for the US debt "crisis."

In an April 2012 article in Forbes titled "If Japan Is Broke, How Is It Bailing Out Europe?" Eamonn Fingleton pointed out that the Japanese government was by far the largest single non-euro zone contributor to the latest Euro rescue effort. This, he said, is "the same government that has been going round pretending to be bankrupt (or at least offering no serious rebuttal when benighted American and British commentators portray Japanese public finances as a trainwreck)." Noting that it was also Japan that rescued the International Monetary Fund (IMF) system virtually single-handedly at the height of the global panic in 2009, Fingleton asked:

How can a nation whose government is supposedly the most overborrowed in the advanced world afford such generosity? ... The betting is that Japan's true public finances are far stronger than the Western press has been led to believe. What is undeniable is that the Japanese Ministry of Finance is one of the most opaque in the world ...

Fingleton acknowledged that the Japanese government's liabilities are large, but said we also need to look at the asset side of the balance sheet:

[T]he Tokyo Finance Ministry is increasingly borrowing from the Japanese public not to finance out-of-control government spending at home, but rather abroad. Besides stepping up to the plate to keep the IMF in business, Tokyo has long been the lender of last resort to both the U.S. and British governments. Meanwhile it borrows 10-year money at an interest rate of just 1.0 percent, the second lowest rate of any borrower in the world after the government of Switzerland.

It's a good deal for the Japanese government: it can borrow ten-year money at 1 percent and lend it to the United States at 1.6 percent (the going rate on US ten-year bonds), making a tidy spread.

Japan's debt-to-GDP ratio is nearly 230 percent, the worst of any major country in the world. Yet Japan remains the world's largest creditor country, with net foreign assets of $3.19 trillion. In 2010, its GDP per capita was more than that of France, Germany, the UK and Italy. And while China's economy is now larger than Japan's because of its burgeoning population (1.3 billion versus 128 million), China's $5,414 GDP per capita is only 12 percent of Japan's $45,920.

How to explain these anomalies? Fully 95 percent of Japan's national debt is held domestically by the Japanese themselves.

Over 20 percent of the debt is held by Japan Post Bank, the Bank of Japan and other government entities. Japan Post is the largest holder of domestic savings in the world, and it returns interest to its Japanese customers. Although theoretically privatized in 2007, it has been a political football, and 100 percent of its stock is still owned by the government. The Bank of Japan is 55 percent government-owned and 100 percent government-controlled.

Of the remaining debt, over 60 percent is held by Japanese banks, insurance companies and pension funds. Another chunk is held by individual Japanese savers. Only 5 percent is held by foreigners, mostly central banks. As noted in a September 2011 article in The New York Times, "The Japanese government is in deep debt, but the rest of Japan has ample money to spare."

The Japanese government's debt is the people's money. They own each other, and they collectively reap the benefits.

Myths of the Japanese Debt-to-GDP Ratio

Japan's debt-to-GDP ratio looks bad. But as economist Hazel Henderson notes, this is just a matter of accounting practice - a practice that she and other experts contend is misleading. Japan leads globally in virtually all areas of high-tech manufacturing, including aerospace. The debt on the other side of its balance sheet represents the payoffs from all this productivity to the Japanese people.

According to Gary Shilling writing in Bloomberg in June 2012, more than half of Japanese public spending goes for debt service and social security payments. Debt service is paid as interest to Japanese "savers." Social security and interest on the national debt are not included in GDP, but these are actually the social safety net and public dividends of a highly productive economy. These, more than the military weapons and "financial products" that compose a major portion of US GDP, are the real fruits of a nation's industry. For Japan, they represent the enjoyment by the people of the enormous output of their high-tech industrial base.

Shilling writes: "Government deficits are supposed to stimulate the economy, yet the composition of Japanese public spending isn't particularly helpful. Debt service and social-security payments - generally non-stimulative - are expected to consume 53.5 percent of total outlays for 2012."

So says conventional theory, but social security and interest paid to domestic savers actually do stimulate the economy. They do it by getting money into the pockets of the people, increasing "demand." Consumers with money to spend then fill the shopping malls, increasing orders for more products, driving up manufacturing and employment.

Myths About Quantitative Easing

Some of the money for these government expenditures has come directly from "money printing" by the central bank, also known as quantitative easing. For over a decade, the Bank of Japan has been engaged in this practice, yet the hyperinflation that deficit hawks said it would trigger has not occurred. To the contrary, as noted by Wolf Richter in a May 9, 2012 article: [T]he Japanese [are] in fact among the few people in the world enjoying actual price stability, with interchanging periods of minor inflation and minor deflation - as opposed to the 27 percent inflation per decade that the Fed has conjured up and continues to call, moronically, "price stability."

He cites as evidence the following graph from the Japanese Ministry of Internal Affairs:

How is that possible? It all depends on where the money generated by quantitative easing ends up. In Japan, the money borrowed by the government has found its way back into the pockets of the Japanese people in the form of social security and interest on their savings. Money in consumer bank accounts stimulates demand, stimulating the production of goods and services, increasing supply; and when supply and demand rise together, prices remain stable.

Myths About the "Lost Decade"

Japan's finances have long been shrouded in secrecy, perhaps because when the country was more open about printing money and using it to support its industries, it got embroiled in World War II. In his 2008 book "In the Jaws of the Dragon," Fingleton suggests that Japan feigned insolvency in the "lost decade" of the 1990s to avoid drawing the ire of protectionist Americans for its booming export trade in automobiles and other products. Belying the weak reported statistics, Japanese exports increased by 73 percent during that decade, foreign assets increased and electricity use increased by 30 percent, a tell-tale indicator of a flourishing industrial sector. By 2006, Japan's exports were three times what they were in 1989.

The Japanese government has maintained the façade of complying with international banking regulations by "borrowing" money rather than "printing" it outright. But borrowing money issued by the government's own central bank is the functional equivalent of the government printing it, particularly when the debt is just carried on the books and never paid back.

Implications for the "Fiscal Cliff"

All of this has implications for Americans concerned with an out-of-control national debt. Properly managed and directed, it seems, the debt need be nothing to fear. Like Japan, and unlike Greece and other euro zone countries, the United States is the sovereign issuer of its own currency. If it wished, Congress could fund its budget without resorting to foreign creditors or private banks. It could do this either by issuing the money directly or by borrowing from its own central bank, effectively interest-free, since the Fed rebates its profits to the government after deducting its costs.

A little quantitative easing can be a good thing, if the money winds up with the government and the people rather than simply in the reserve accounts of banks. The national debt can also be a good thing. As Federal Reserve Board Chairman Marriner Eccles testified in hearings before the House Committee on Banking and Currency in 1941, government credit (or debt) "is what our money system is."

"If there were no debts in our money system," said Eccles, "there wouldn't be any money."

Properly directed, the national debt becomes the spending money of the people. It stimulates demand, stimulating productivity. To keep the system stable and sustainable, the money just needs to come from the nation's own government and its own people, and needs to return to the government and people.

Copyright, Truthout.



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[-] 1 points by hchc (3297) from Tampa, FL 11 years ago

It's a race to the bottom. No can pay off thier debt. All industrialized nations are devaluing.

Japan contributing to the Euro bailout means nothing except they just penalized their country even more.

[-] 1 points by geo (2638) from Concord, NC 11 years ago

You are misunderstanding what the role of the federal debt is in a fiat currency. It is not there to be paid off. You, and others, are pushing commodity backed currency ideology onto the fiat system... which doesn't work...... Modern Monetary Theory:

The Role of Public Debt

Just as tax revenue is not required to fund government spending, public debt is in no way needed to fund budget deficits. There is no need for the government to borrow in order to fund its net spending, because it can create its own money at will. Yet, currently, the government does issue public debt, so this requires explanation. The debt must be serving other purposes, even if the government really does think the debt funds its deficit expenditure.

At present, government debt does indeed serve various functions, though none are indispensable. One function is operational. The central bank uses government-debt management as a means of controlling the short-term interest rate. Whenever there is a net flow of funds out of the banking system or a net flow into it, the central bank buys or sells short-term government bonds to put the system back in balance and maintain its target interest rate.

The effect of a budget deficit is to cause a net inflow of funds, because it involves the government crediting private bank accounts (spending) more than it debits them (taxing). As a result, there is an overall increase in private bank deposits and a corresponding increase in the reserves of private banks, which are held in accounts with the central bank. Banks will be keen to exchange their excess reserves for short-term bonds, to earn higher interest, but because the system is in surplus, there will be excess demand for available bonds.

If the central bank stood aside and left private banks to compete for existing bonds, the price of the bonds would skyrocket and the interest rate, which is inversely related to the bond price, would approach zero. If the central bank’s official interest-rate target is above zero, it has to step in and mop up the excess liquidity by selling government bonds (issuing public debt) in exchange for the excess reserves. In other words, debt is issued to control the interest rate, not to fund the net expenditure.

Government debt also provides the private sector with a vehicle for saving. Bonds provide a risk-free return that exceeds the interest rate paid on bank reserves, and so are sought by private-sector agents.

The private-sector desire for bonds was made very evident in Australia during the period of the Howard government, which oversaw ten budget surpluses in eleven years. Since the budget was in surplus, it was initially supposed that there was less need to issue government debt – the assumption being that the purpose of debt is to fund budget deficits. The assumption was quickly revealed to be unfounded. The drying up of government debt caused disquiet in the financial community, which suddenly had less access to risk-free government bonds.

The government’s response was for the central bank to sell bonds (issue debt) even though there was no budget deficit. This should have demonstrated to orthodox economists once and for all that the issuance of public debt has nothing to do with funding government net spending.

In short, the government has no need of funding. It is in a position to create and destroy its own money as it pleases. Whenever it transacts with the private sector – a ‘vertical’ transaction – money is either created or destroyed. Whenever the government runs a budget deficit or surplus, there is a net change in private-sector holdings of financial assets. In contrast, when private sector agents transact among themselves – a ‘horizontal’ transaction – there is no net change in financial assets, because such transactions always create a private asset and a matching private liability, netting to zero. The government can create or destroy net private financial assets at will; the private sector cannot. Private-sector agents are financially constrained; the government is not.

Although it is true that government debt currently serves various functions, these functions could be achieved in a different – and more direct – way. The central bank could simply pay its target cash rate on all bank reserves. This would ensure that its short-term interest-rate target was achieved without any need to issue public debt. It would also provide a saving vehicle to the private sector that is equivalent to short-term bonds.

The simplicity of this solution suggests that other factors must be at play in prolonging the unnecessary issuance of government debt. Most likely there is a political motivation. The existence of public debt makes it appear as if it is possible for the government to run into debt problems. It gives the false impression that there are financial limits to the expansion of public-sector activity, when there are only resource and political limits. And it means the government can claim it is not meeting social demands because they are “unaffordable”. In this way, community fear over the supposed perils of government debt serves a political and ideological function for sections of capital and capitalist governments.

In Britain, the fear of public debt appears to have aided financial capital in its demands for a return to fiscal austerity, despite the economy struggling to recover from its worst recession since the 1930s. In the United States, Obama has claimed repeatedly that “the government is running out of money”. Such claims have the effect of legitimizing inaction on unemployment, insufficient reform of the US healthcare system, cutbacks in education, inadequate provision of childcare, etc. The notion of a government running out of its own fiat currency is nonsensical. In spite of this, the illusion that public debt can be a problem persists, and even many economists are captive to it.

[-] 1 points by geo (2638) from Concord, NC 11 years ago


If we see through the illusion, though, it seems that the introduction of fiat money is socially very significant. In commodity-money and commodity-backed money systems, external undemocratic pressures were frequently imposed on sovereign nations. Governments were not completely free to create and destroy money in whatever way best met the needs and wishes of the community. This is because they were obliged to keep the quantity of money in circulation in a certain relationship to their gold reserves or, under Bretton Woods, their foreign currency reserves.

Under Bretton Woods, for instance, the US government was obliged to stand ready to convert the US dollar to gold on demand at $35 an ounce. If the US government acted in ways that reduced the real value of the US dollar, or other governments or private-sector agents acted in ways that increased the market value of gold, the US government would be forced to pay an ounce of gold for $35 when in reality the value of an ounce of gold might have risen to $45 or $50. This requirement hampered the US government in its domestic operations. Eventually, due to the costs of the Vietnam War, the US government under Nixon refused to continue convertibility and the system broke down.

More generally, commodity-backed money meant that trade-deficit economies were always under pressure to restrict domestic demand in order to preserve the foreign-exchange value of their currencies. In effect, the system created external, undemocratic pressures that hindered a sovereign government’s pursuit of the will of its citizens.

Japan is a case in point. In that country, the government has implemented very large budget deficits year after year since the Asian crisis. The rating agencies downgraded Japan’s credit rating significantly, which many observers initially feared would undermine confidence in the Japanese government and currency, and cause inflation and high interest rates. But this has not occurred. Demand for government debt has remained strong with interest rates at or near zero, and inflation is not at all in prospect. Even if demand for government debt weakened, the Japanese government could simply stop issuing debt, since it is unnecessary in any case.

The global financial crisis has made very clear that the rating agencies do not deserve to be taken seriously, and the Japanese government is right to ignore them. The agencies hand out AAA ratings for toxic junk while supposing that a sovereign government who is the monopoly issuer of its own fiat currency can somehow be at risk of insolvency.

The implication of fiat money is liberating: a popularly backed government is free to spend on what it sees fit, provided the necessary resources are available. There is no financial constraint. There is no need for taxes or government debt to fund the spending. Taxation is necessary to create space for the desired level of public-sector activity, but it does not fund government spending. Fiat money enables a system in which, in principle, the government is constrained only by real resources and the political desires of the community. For this principle to be put fully into practice, there needs to be democratic accountability. The community’s desire may be for small government or a much larger role for public-sector activity. Fiat money makes either feasible.

It is not clear, however, that the implication is widely understood, even among economists. It is in the interests of a small minority to try to conceal the implication, because fiscal austerity suits elite interests. It results in high unemployment, which suppresses real-wage growth. It also creates an impression that desirable social policies are “unaffordable”, legitimizing inequality and government inaction.

But the truth about a fiat-money system is made visible from time to time. We get a hint of the secret with the seemingly schizophrenic attitude of financial capital toward the bank bailouts on the one hand, and fiscal stimulus on the other. If fiat-money creation held such grave inflationary consequences and placed an unbearable debt burden on future generations, how could financial capital possibly stomach the bank bailouts? The fact it objects to fiscal stimulus to create jobs on these grounds while embracing the much larger bank bailouts only adds to the impression of schizophrenia.