No Money, No Problem, Bank of Japandemonium Takes Care Of It

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In the days before Christmas and New Year’s, when no one was supposed to pay attention, Japanese Prime Minister Shinzo Abe, his ministers, and coalition partners agreed on a draft budget for fiscal 2014, which starts April 1. It’s a doozy. Instead of slowing down the fiscal fiasco engulfing Japan, Abenomics is speeding it up.

Spending rises to a record ¥95.9 trillion ($921 billion) – a prevarication, but more on that later. Social security outlays increase 4.8% based on the costs incurred by the aging population. Defense, stirred up by thorny entanglements with China, rises 2.9%, a breath-taking jump in defense spending for Japan. And public spending for new bridges to nowhere, needless river embankments, and other worthy projects, some for the Tokyo Olympics, soars by 12.9% to nearly ¥6 trillion.

These endless fish-barrel projects have failed to cure the wheezing economy over the last two decades, but hey, that’s no reason to stop them now! They’re essential gifts for Japan Inc. and political cronies.

So the hype apparatus kicked in and claimed with fanfare that the government would need to issue only ¥41.25 trillion in new bonds, thus borrowing 43% of the total outlays, down from the current fiscal year’s “initial” budget, which had foreseen new bond issuance to cover 46% of total outlays.

But the shenanigans rolled into this conclusion could take your breath away, if you still had any left, after looking at these numbers.

Every year, the government passes between one and four “supplementary budgets,” or stimulus packages, paid for with borrowed money. For example, in the current fiscal year, the initial budget was ¥92.6 trillion. After a ¥10.3 trillion “supplementary budget” was tacked on, the first Abenomics budget hit a record ¥102.9 trillion.

Same thing in fiscal 2014. With an elegant Abenomics twist. A supplementary budget of ¥5.5 trillion already made it through the system – the Japanese don’t dilly-dally around with their stimulus packages. Ironically, it is supposed to counteract the impact of the consumption tax hike, effective April 1. Last time Japan jacked up the consumption tax, it triggered a buying spree beforehand and a long recession afterwards. This time, the tax hike is expected to extract ¥4.5 trillion in revenue from the unwilling Japanese. All of it, plus ¥1 trillion, will be paid to recipients of the “supplementary budget.” Robbing Peter to pay Paul.

This “supplementary budget” of ¥5.5 trillion and the initial budget of ¥95.9 trillion bring total outlays to ¥101.4 trillion. The elegant Abenomics twist? Timing has been re-engineered to where the supplementary spending is accounted for in fiscal 2014, but the bonds to pay for it are issued in the current fiscal year, which no one looks at anymore, and where they dissipate into oblivion. Abracadabra. Sudden signs of improvements!

In reality, of the total outlays of ¥101.4 trillion, part of it will be covered by tax revenues of an estimated ¥50 trillion – the highest since 2007, hallelujah. The rest, ­¥51.4 trillion, will be paid for with borrowed money…. 50.7% of every yen spent will be borrowed, not the ludicrous 43% the government is trying to get their holiday-bedazzled people and everyone else around the world to swallow.

Worried, moi? Ha! The Bank of Japan will take care of it!

In its perfectly orchestrated manner, the BOJ, at its board meeting just before the budget fiasco surfaced, affirmed its pledge to water down the yen 50% over two years by printing ¥60 trillion to ¥70 trillion per year and buying mostly government bonds with it.

Out of the other side of its mouth, the BOJ keeps emphasizing relentlessly to an incredulous world that it is not, repeat not, monetizing the budget deficit in any way, shape, or form. It’s just conducting monetary policy or something.

How stupid do they think we are? Very, apparently. Because the Bank of Japandemonium is not only monetizing the entire deficit, but also part of the existing debt. It should just come out and admit it.

I would certainly respect a smidgen of rare honesty from a central bank. It could say, for example, that it’s going to monetize the deficit and the debt until much of the mountain of JGBs is securely piled up on its balance sheet. There, it can gradually go to hell because one way of dealing with it would be a controlled slow default under the guise of “monetary policy.”

The goal would be to create as little havoc as possible while spreading the losses as widely as possible. The older generation, the assiduous savers that greatly benefited from the deficit-funded welfare system, would get hit the hardest. The BOJ should just come out and say that.

It could simply admit what everyone already knows: after decades of living off borrowed money, and with still no plan in sight for addressing the problem, and no willingness by anyone to pay for more than half of what the government spends, there simply aren’t any good solutions left. And if that quadrillion yen in public debt – which pension funds, banks, individuals, and mega-bondholders like government-owned Japan Post carry as assets on their books – is in the process of getting watered down, so be it.

To mollify our fears, it should further admit that, by buying every government bond that isn’t nailed down, it controls the entire JGB market, and it won’t allow yields to spike – which is key; a spike in yields could topple its precarious construct in one fell swoop.

Japan’s new economic religion of printing itself out of trouble works. For the elite. This is a lesson learned from the Fed. But how are workers and consumers faring? And by implication the real economy? Read….This Inflation Is Supposed To Be GOOD For Japanese Workers?

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