A little bit of a different blog post format today. I mentioned in this blog post – Apparently core MMT idea is now supported by the mainstream (October 16, 2019) – that the Japanese government had taken issued a statement, by way of a formal answer to a series of questions from Japanese CDR politician Kazuma Nakatani on the opening day of the new Parliament (October 4, 2019). The Japanese government reply was not available in full at the time I wrote that but it was reported in the Japanese Media that the Government response could be summarised as “As a government, we don’t implement policy based on the idea that Japan is a successful case of MMT because its inflation and interest rates are not rising despite massive debt … We are working to restore fiscal health”. Which I thought was an interesting way of trying to deny the undeniable but also missed the point somewhat – being that MMT is not a ‘case’ but rather just provides an alternative lens to understanding the way in which modern monetary systems operate, the capacities of the currency-issuing government within those monetary systems, and the consequences of particular policy choices. In that context, over the last 3 odd decades, the Japanese government has pushed policy into new domains – large-scale central bank government bond purchases with continuous, and, at times, relatively large fiscal deficits yet has seen interest rates fall to zero and below, inflation low to negative and negative long-term bond yields. The consequences of the policy choices have been anathema to those predicted by mainstream macroeconomists. Japan has essentially defied mainstream economics and demonstrated its falsities. The only body of macroeconomic thought that gets close to explaining the Japanese situation is Modern Monetary Theory (MMT). That is why our work is being discussed at the highest levels in Japan. Anyway, today, I can present full translations of the Questions and the Government response with my annotations of that response. My translation was considerably enhanced by Kobayashi Chie and I thank her heaps for her help.
It started on October 4, 2019 in the Japanese Diet with – Question No. 14 – ‘MMT (Modern Monetary Theory) Questions’, which were submitted by Mr Kazuma Nakatani and contained nine queries in total for the Government to answer.
Here is the edited text in English.
MMT (Modern Monetary Theory) Questions
The so-called MMT (Modern Monetary Theory) asserts that as long as governments and central banks can issue their government bonds in their local currency, it will not default even if the budget deficit is expanded. The nation imposes tax payment obligations on its citizens, and the “currency” is determined by law as a means of tax payment. In MMT, therefore, people in the nation recognise the value of the “currency” when demanded as a means of fulfilling tax obligations. As a result, the currency will be used and circulated as a means for private transactions and savings.
Also, MMT considers that one entities’ debt is another entities’ credit, and one entities’ deficit is another entities’ surplus.
To simplify, the government sector deficit is the non-government sector surplus, such that the domestic private sector balance + the domestic government sector balance + the external balance sum to zero).
Globally, US Democratic Congress representative Ocasio-Cortez expressed her support and MMT has became a hot topic; economists and well-known investors commented on MMT and the theory attracted much attention. Based on this situation, we think that it is necessary to consider this issue in Japan.
I would like to ask the following questions to confirm the Government’s view.
- Japan’s debt-to-GDP ratio exceeds 236% at the end of fiscal year 2017, and amounts to 1,294 trillion yen. Japan’s debt balance surpasses Greece, which was said to be on the verge of bankruptcy in 2010, even as a percentage of GDP. However, the yield on 10-year government bonds has been at the lowest level in the world, and is has at times in the recent period been negative.
Based on this situation, does the government think there is a causal relationship between interest rates changes and the evolution of the public debt ratio?
Also, if the answer is that there is a causal relationship, I would like to ask the Government to quantify that relationship.
- Since the Japanese government debt was around 400 trillion yen around 20 years ago, it has been said that “when the amount of the government debt is accumulated as much as the nation’s GDP, then interest rates will rise and the currency will fall, which triggers hyperinflation.”
This is the Ministry of Finance’s expressed opinion based on commodity currency theory, but prices in Japan have not risen no matter how much time passes.
Nevertheless, there are still voices that these events will occur someday. However, there are other voices that Japan will never face bankruptcy and the fact that those events have not occurred demonstrates the core arguments made by MMT.
I would like to know What the government’s views about these differing opinions.
- On April 4, 2019, the Bank of Japan Governor Kuroda said, “As for the so-called MMT, in my opinion, it is not a coherently structured theory, and it is not easy to grasp as a whole, so it is quite difficult for me to grasp its essence. But, I understand that, according to the basic claims of MMT, since the government will never default on debt issued in its own currency, that fiscal policy should focus on stabilising the economy without considering the size of budget deficit or debt balance. The idea of not considering the budget deficit and debt balance is an extreme claim, and I think that is difficult to accept.”
Does the government have the same view? If you have a similar view, then I would like to know why you support this view of MMT and to elaborate in detail what parts of MMT the Government thinks are incorrect or missing?
- In 2002, a credit rating company downgraded Japanese government bonds. At that time, the then Vice Minister of Finance Kuroda (the current governor of the Bank of Japan) stated in the open letter addressed to Moody’s, S&P, and Fitch, that “the default of the domestic currency-issued government bonds is unthinkable. What kind of situation do you assume as default?”
I would like to ask you whether the official Government opinion remains the same as that expressed by the then Vice Minister of Finance in 2002.
- At the House Councilors Financial Committee on April 4, 2019, Governor Kuroda of the Bank of Japan, received the following question: “banks can create millions and even billions of money by credit creation. If borrowing increases, deposits as loans increase. That is the reality. What do you think?”.
In reply, he admitted that “as you have pointed out, deposits are created by banks’ credit behavior.”
MMT applies a similar logic to government credit creation.
For the government to deficit spend, it matches the deficit with bond issuance. The government spending creates income for the private sector and private deposits equivalent to the amount of fiscal expenditure will be created, and the supply of currency in the economy increases. Therefore, the interest rates will not rise as a result of money supply tightness, and there will be no default by government.
If the government sector is in the red, the private sector will be in the black. In other words, the more the government issues government bonds, the more private deposits will increase.
What does the Government think about this?
- MMT economists and Takeshi Nakano of the Japanese Ministry of Economy, Trade and Industry, assert that “it is technically impossible for the government to default on its liabilities that are denominated in its own currency, and, that there is no historical example of such a default”.
I would like to ask the government’s view whether this perception is correct or not.
- According to the Ministry of Finance’s website, about one third of all expenditures depends on bond income, and that situation is described as “putting a burden on future generations”.
According to the references on June 19, 2019 at the Sub-Committee of the Financial System Council, which is the Finance ministry’s advisory body, it states that “the resulting increase in public debt balance is nothing less than turning to future generations.”
However, in advertising videos and materials for personal bonds produced by the Ministry of Finance, the message “Gift for the Future. Government bonds for individuals” is articulated.
This appears to be a very different outlook of the implications of government debt issuance than the ‘burdening future generations’ narrative.
I would like to ask the Government’s view – it government debt a burden for the future generations or a gift for the future?
- It is claimed that the source for the funds for the redemption of outstanding government bonds will be the tax paid by future generations. If the bonds are not redeemed, then the bond holders themselves will incur the damage.
Is this correct? What is the Government’s view on this?
- The Ministry of Finance produced some “Explanatory Documents (regarding the current fiscal situations in our nation)” at the Sub-Committee of the Financial System Council held on April 17, 2019, which is now available for the public to view.
In those documents, there is a column “Criticisms and comments on MMT”, which only states some excerpt of criticism of MMT made by others.
IMF Executive Director Christine Lagarde, is as an example of one such critic and is quoted as saying: “We do not think that the Modern Monetary Theory is actually the panacea. Cases where MMT can function is extremely limited. We don’t think that any country is currently in a position where that theory could actually deliver positive value in a sustainable way. It is tempting, when you look at the (theoretical) mathematical modeling of it, but there are important caveats. If interest rates start to rise (due to expansion of borrowing), we may be caught in a trap.”
However, Lagarde also said “if there is deflation, then in those circumstances it could possibly work for a short period of time”. But this additional comment is not stated in the explanatory documents given to the Sub-Committee.
In this way, the Ministry of Finance has excluded positive comments regarding MMT, and only extracted negative comments.
I would like to know the government’s views on the reason why the only negative comments are provided in the explanatory documents.
Those were the questions.
The Government’s Answer – with annotations from me
The – Government’s answer – was posted on October 15 by the Chairman of House of Representatives Tadamori Oshima and sent to Prime Minister Shinzo Abe.
About One: The government bond interest rate is determined in the market against the backdrop of various factors such as economic and financial conditions. It is difficult to make a prediction such as “What will happen to the interest rate if the amount of the national debts changes?” but it is one of the factors that affects interest rates as it may affect market confidence in government financial management.
Bill: In other words avoiding the question of causality altogether. Mainstream macroeconomics makes it clear that the causality runs from the volume of debt to the yield.
So for them, the causality arises from the government bonds increasing competition for a finite pool of savings with firms seeking investment funds. As a result, bond yields rise due to scarcity. Further, yields rise due to rising risks of inflation and default.
But, of course, how then does one explain the fact that rather large and continuous deficits in Japan have been associated with low to negative interest rates and bond yields.
About Two: There are various assertions about the Modern Monetary Theory (hereinafter referred “MMT”) by its theorists, hence it is not always clear what is the “policy based on MMT” refers to. But regarding the claim that “Japan is a successful example of MMT, where there is a huge budget deficit, inflation and interest rates have not risen”, the government has not formulated its policy based on such an idea.
We aim to stabilise the fiscal soundness by achieving a primary balance surplus for the national and regional governments combined by 2025. We also aim to achieve a stable reduction in the public debt to GDP ratio.
Bill: Here we encounter one of these recurring misunderstandings about MMT – “policy based on MMT” implies that there is a set of policies that Japan is following that represent core MMT.
The actual correct statement, is that the consequences of the policies chosen by the Japanese government over the last three decades have delivered outcomes that defy mainstream macroeconomics and have demonstrated the predictive accuracy of the core body of MMT work.
MMT economists predicted that the Japanese government (Ministry of Finance and Bank of Japan combined) would be able to maintain interest rates and bond yields at low levels indefinitely irrespective of what was happening on the Bank of Japan’s balance sheet.
We also predicted that the Japanese government would not have to default and its debt would be highly attractive even at low yields. The mainstream macroeconomists predicted exactly the opposite.
About Three: I am not necessarily aware of the background or basis of the remarks made by the Governor of the Bank of Japan, Mr. Kuroda, nor as to whether individual theories are correct or whether there are elements that are missing. This requires academic evaluation, and the Government refrains from answering your question.
Bill: Denial. In the response to Question 2, the Government adopts a very explicit ‘sound finance’ theme – that there is virtue in running primary fiscal surpluses at all levels of government.
While it pragmatically avoids doing that and every time it attempts to engage in what it calls ‘fiscal consolidation’, the economy tanks, it is still holding out mainstream macroeconomic theory as the benchmark to guide its policy choices.
About Four: The open letter by the Ministry of Finance addressed to the foreign rating companies in order to seek more objective explanations for their decision to downgrade Japanese government bonds in 2004.
Bill: Completely avoids the question which was whether the Government still believes that its debt has zero default risk.
About Five: Your statements: “For the government to deficit spend, it matches the deficit with bond issuance. The government spending creates income for the private sector and private deposits equivalent to the amount of fiscal expenditure will be created, and the supply of currency in the economy increases. Therefore, the interest rates will not rise as a result of money supply tightness, and there will be no default by government” and “the more the government issues government bonds, the more private deposits will increase” are not necessarily clear.
But the Government has not developed its policy choices based on the idea that Japan is a successful case of MMT because its inflation and interest rates are not rising despite massive debt”. We think it is necessary to continue efforts to improve fiscal soundness to ensure that the market confidence retains confidence in our fiscal management.
In addition, with the aim of revitalising the economy, we will continue to promote growth potential programs such as by strongly promoting the growth strategy execution plan.
Bill: The reality remains that the consequences that have flowed from the policy choices the Japanese government has made fit the analysis of outcomes presented by MMT, and, categorically refute what mainstream macroeconomics has been predicting about Japan for nearly 3 decades.
That is the point.
No-one is asserting that the Japanese policy makers regularly consult an MMT textbook when they formulate policy.
When I say that Japan is the best real world example of MMT analysis, I am saying that its policy inputs and outcomes accord closely with MMT predictions and not at all with those derived from the alternative, competing mainstream macroeconomics.
It is clear that the Bank of Japan understands the way the monetary system operates and its capacities within it and exploits that understanding relentlessly over a long period despite all the warnings and predictions of doom from the mainstream of my profession and the hangers on to that mainstream in the financial press.
About Six: Since there are various assertions about MMT by its theorists, and the assumptions and grounds for the claims are not clear.
The government does not wish to answer the question.
The assumptions and grounds for the claim that a currency-issuing government can never run out of its own currency and that their is never a financial reason for it to default on any outstanding liabilities it issues in that currency are straightforward and crystal clear.
About Seven: The Ministry of Finance considers that the purchasers can manage the assets for a certain period of time using personal government bonds, hence it uses the term “gift for the future. JGB for individuals”.
However, we regard government bonds to be the same as national debts, we think it is necessary to proceed our efforts to improve fiscal soundness without leaving the burden to the future generations.
Bill: No answer at all. Doesn’t address the contradictory messaging the Government uses when talking about its own debt in different domains of interest.
The question was exploring the hypocrisy of a Government, who, on the one hand, talks about debt burdening the future generations (despite it being their wealth), yet, on the other hand, being a benefit for the future generations.
About Eight: The government is responsible for the repayment of principal and interest on government bonds, and we would like to steadily move forward to achieve the nation’s fiscal soundness so as to ensure the repayment of government bonds ensured.
Bill: Denial of the Government’s own currency capacity.
The question was about how the governments roll over their debt when specific issues mature.
It is clear the Government in Japan has no problem paying back the debt on maturity and does not have to raise taxes in order to do it.
It is also clear that debt holders are always paid back – that is, there is no default.
So, to suggest that the Government has to impose austerity by adopting the principles of ‘sound finance’ in order to continue doing what it has done for decades is nonsensical and just a ruse to mislead the Parliament from the true capacity the Government possesses as the currency issuer.
About Nine: As to the criticism and comments on MMT you pointed out, that is an excerpt of the main points of evaluation for MMT made by the experts such as economists and foreign government officials. Your claim that “positive comments are excluded and only negative comments are intentionally extracted and summarised” is not correct.
Bill: The question was clear – why was the Government’s own briefing documentations for its own committee processes biased against MMT – in that it selectively quoted people by only producing what might be construed as being negative comments and leaving out the positive.
I have not seen the briefing documents so I don’t know whether the propositions in the Question are accurate or not.
But given the rest of the answers that the Government provided, I would suspect that the Question has validity and the Government did attempt to suppress any positive responses concerning MMT.
At any rate, it is an empirical issue and easily checked.
I think it was important to document this interchange for the public record in English.
The evidence is clear.
For some reason, the Japanese government is highly resistant to admitting the obvious.
It wants to hold out a view that its macroeconomic policy thinking is mainstream orthodox and the major prognostications of that orthodoxy are binding constraints on its fiscal space.
The reality is that mainstream macroeconomics has never been able to grasp the dynamics of the Japanese monetary system and that MMT provides a sophisticated and accurate understanding for the links between policy inputs and their consequences.
My speaking visit to Japan begins late next week. It will be interesting to talk these issues over with the concerned parties.
Thanks again to Chie for her assistance.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.