The following is from an article published by Mr. Hideo Tamura in the Sankei Shimbun on May 16 titled 'The Bank of Japan should not lose to the FRB and print money.'
He is a genuine economic reporter, one of the few people who makes a living in Japan's economy, among most of whom are the people who talk about the economy and finances as peddled by the Ministry of Finance.
This paper is the most crucial paper at the moment in economic and fiscal theory.
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Federal Reserve Board, the FRB is issuing dollar funds at a furious pace.
It is to overcome the new coronavirus panic that is coming from China.
The dollar grew by 2.5 times as much as it did after the Lehman Shock of September 2008, a financial crisis that is truly unprecedented in the two months from the outbreak of the crisis to early May.
Here's the question.
(1) Won't the U.S. see malignant inflation even if it prints so much money?
(2) Will it be positive for the Japanese economy?
I'll give you the answer first.
(1) No fear of high inflation
(2) If the Bank of Japan loses out on printing money to the FRB, Japan's coronal recession will accelerate.
The total amount of money in a country is called the "money stock" and is expressed in terms of the sum of cash available to the world and deposits that have a cash-like character.
On the other hand, the monetary scale of the economy in which we live is expressed in terms of gross domestic product (GDP), total output multiplied by prices.
Money stocks are linked to GDP.
If only money goes up while output goes down, prices will rise, and in this case, we will have malignant inflation.
Germany after World War I, and parts of Latin America and Africa in recent years that have run amok with their currencies, are prime examples.
Ridiculously, the Ministry of Finance-patronized scholar and media circles have argued against the Bank of Japan's issuance of currency and the Bank of Japan's purchase of government bonds because this could lead to malignancy inflation in Japan.
The point is that when demand is in short supply relative to production capacity, most of this money does not become money stock, even if the central bank prints money.
The central bank prints money and buys up government bonds, mainly from financial institutions. The money is transferred to a checking account that the financial institutions have at the central bank.
If financial institutions lend this money to companies and households, the total amount of money (money stock) will increase because it will return as deposits.
But when deflation and financial crises make the future unpredictable, banks try to reduce their lending.
Businesses and households also try to avoid debt as much as one can manage.
In Japan, the U.S., and other countries hit by the coronal shock, output, which represents real GDP, has shrunk by several tens of percent a year.
The total amount of money will decrease as banks lend less.
The result is deflation.
After the Lehman shock, the FRB printed four times as much money in dollars as before, but the inflation rate remained low because it could barely avoid deflation.
In this time of coronal shock, even if the FRB were to print unlimited amounts of money by buying Treasuries for the foreseeable future, it would not only not increase inflation, it would do its best to relieve deflationary pressures.
The FRB Chairman Powell has clearly declared his support for the Trump administration's increase in the national debt.
The Trump administration is trying to increase money-backed demand (sufficient demand) by spending in the $3 trillion to $4 trillion range.
The FRB's increased money printing, combined with an increase in government bonds, is the only way to prevent a deflationary depression.
What about Japan?
In the previous article, I argued that the U.S., which relies on foreign debt, faces the risk of dollar instability, and that China, which is constrained by its foreign exchange reserves, has limited fiscal and monetary expansion. In contrast, Japan, which has the world's most abundant resources in the form of money, can easily overcome the Corona Depression.
However, there are conditions.
The Bank of Japan doesn't lose out on printing money against the FRB.
If it loses, the yen will significantly appreciate the Japanese economy, which could sink into the abyss of catastrophic deflation even if the coronal catastrophe passes.
In fact, it was the Lehman shock in September 2008 that caused it.
The graph shows the Bank of Japan (BoJ) fund issuance per dollar of Fed dollar funds issued after the Lehman crisis (Soros chart) and the change in each asset. Central banks print money to buy bonds and other assets.
After the Lehman crisis, the FRB printed the dollar at breakneck speed, but then BOJ Governor Masaaki Shirakawa did not print the yen.
The Yen rate on the Soros chart continues to fall sharply.
In the market, the yen entered a sharp appreciation phase.
Abenomics began in December 2012, and the Bank of Japan embarked on a new dimension of monetary easing.
The Soros chart has reversed, and the ultra-strong yen has switched to a weaker yen.
After that, the exchange rate began to stabilize at around 110 yen to the dollar.
At the beginning of the Corona shock, the Bank of Japan held back, but on April 27, it announced that it would purchase JGBs without a ceiling.
He said it was to keep the bond rate at zero percent.
Since the demand for government bonds by financial institutions with too much money is excellent, the BOJ's purchases will at least bring the interest rate on government bonds to zero.
The Soros chart shows the same gradient as after the Lehman crisis, pointing to a stronger yen.
The government should work together to issue 100 trillion yen of government bonds, and the Bank of Japan should buy 100 trillion yen.
(Editor.)
＝(The next one will post on June 6)
