Thursday, December 25, 2014
No, Japan Cannot Stop Printing Yen
The official story is that Japan is printing like crazy just because they want more inflation and that they will stop when they get to 2% inflation. The story makes it seems like the government and central bank have things under control. Like they are making the markets do what they want. The vast majority of articles I read on the net seem to accept this official story as truth, but it is not true.
With 5 year bonds paying 0.03% interest, the rational investors are getting out of JGBs. The central bank is probably the only net buyer. The central bank is making about 80 trillion new Yen per year and buying bonds when total taxes collected are about 50 trillion yen per year. This is an enormous amount of new money.
They have been increasing the base money supply by around 1% every 10 day reporting period. You have to be a fool to buy bonds paying 0.03% interest per year in a currency where the base money supply is going up around 1% every 10 days.
If we average over the last 4 months, the Yen is losing around 1% per week compared to the dollar. You have to be a fool to buy a 5 year bond paying 0.03% interest in a currency losing about 1% per week.
The Japanese government is spending about twice what they get in taxes. Nobody likes spending cuts and nobody likes tax increases. Not enough voters or politicians will view this as a problem as long as they can print money for the difference. You have to be a fool to buy bonds in a country that spending twice what they get in taxes and running the printing presses to cover the difference.
However, if they let interest rates go up in an attempt to attract bond buyers the interest on the debt would be more than the taxes collected. This makes it clear they are going to have to print money and so the money that you get back when the bond comes due will not be worth as much as the money you bought the bond with. You would have to be a fool to buy bonds from a government where the interest on their debt was more than their total taxes.
Not only do you have to be a fool to buy JGBs, you have to be a fool to hold them or roll them over. So not only do they have to print Yen to cover the deficit, but also the bonds coming due. The government has previously issued bonds more than twice the total GNP and much of it is short term. As it comes due they have to pay the bond holders. The only way they can get money to pay previous bonds is by first selling a new bond, since taxes don't even cover spending. The only way they can sell a new bond is if the central bank prints Yen and buys the bond. Governments never default on debts in a currency they can print. They print.
Japan has entered a death spiral where the more people that get out of JGBs the more Yen they have to print but the more Yen they print, the more people get out of JGBs. This death spiral is a positive feedback loop that once started is very hard to stop.
Recently Krugman got in a limo with Abe and advised him to delay a tax increase and do more money printing (he would really have said "stimulus"). Krugman may soon wish he had not gotten his name attached to the mess that is coming.
Even at 120 Yen per dollar, we are talking trillions of dollars worth of bonds. Fools with money will hardly make a dent in this. The central bank will keep being the buyer of only resort. The central bank must keep printing no matter if it lets interest rates go up or if they keep interest rates down. They have past the point of no return. They can not stop at 2% inflation. Yen printing is out of control. It is no longer possible to halt it.