How to consider the Snowball effect of National Bonds after the Pandemic?
(May 2020)

On April 30, the 2020 supplementary budget was enacted in the Diet. Its volume is around ¥25 trillion ($250 billion), which will be procured by issuing national bonds. Financial institutions will bid for the new bonds, while the Bank of Japan (BOJ) is slated to purchase the same volume of national bonds in the market. This is the money easing policy of "Abenomics", which literally means the BOJ will print money.

As a consequence, the government can rescue individuals, companies, especially small and medium-sized, hospitals and so on from the coronavirus crisis. Similarly, in advanced nations, urgent economic policies accompanied with a huge issuance of national bonds are being adopted as countermeasures against the coronavirus pandemic. As a result, this is why the "Modern Monetary Theory" (MMT) has been gaining attention around the world. (I described MMT in my new book entitled "Japanese Politics One Politician’s Perspective")

However, the amount of national bonds approaches ¥1,000 trillion ($10 trillion), with its gross-debt-to GDP ratio in 2019 around 240%. (Even though, government financial assets are around ¥620 trillion.) Major economists fear hyper-inflation attributed to excessive liquidity of money, while MMT insists that the government can supply money within 3 to 4% inflation. As of today, the inflation rate is below 1% in Japan. However, without such vast expenditures by the government against the pandemic, many people will die and innumerable corporations will go into bankruptcy.

The coronavirus pandemic still knows no bounds. As of May 4, the number of infections topped 3.5 million, with a death toll near 250,000. In Japan, there are 16,385 confirmed cases and 771 fatalities. On May 7, the ABE Cabinet announced an extension of the "State of Emergency" until May 31, due to the epidemic.

This will further force individuals and corporations to endure harsh economic conditions. Prime Minister ABE ordered his Cabinet to prepare a second 2020 supplementary budget to protect people’s lives and small and medium-sized businesses. The LDP Secretary-general, Mr. NIKAI claimed ¥50 trillion for the second 2020 supplementary budget.

Perhaps, the amount of national bonds will further snowball. How will the government reduce such a huge debt? After the pandemic, Japanese economy will rapidly recover and as a result, tax revenue will increase. If the inflation rate exceeds 3 to 4%, the government will raise tax rates. Nevertheless, it is difficult to reduce the balance of national bonds.

However, according to the principle of "System of National Accounts",
S: Savings of private sector; G: Government expenditure; T: Tax revenue.
This equation means; a flow of savings from the private sector (S) is equivalent to the volume of fiscal deficit (G-T). Fiscal deficit reflects savings of the private sector, and fiscal reconstruction leads to a reduction of savings of the private sector. Therefore, it can be said that national bond equals debt for the government, but is asset for the people. An excessive fiscal reconstruction will surely depress economy. The government needs to strike a balance between economic growth and fiscal reconstruction.

By Yuzuru Takeuchi



その結果、政府はコロナウイルスの危機から、個人や企業、特に中小企業、病院などを救うことができる。同様に、先進諸国においても、巨額の国債発行を伴う緊急の経済政策が、コロナウイルスの世界的大流行の対策として採用されつつある。その結果、このような理由から現代貨幣理論(MMT)が、世界中で注目を集めているのである。(MMTについては、私の新著「Japanese Politics One Politician’s Perspective」で述べている)