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Next BOJ chief should accept monetisation

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Bank of Japan has a morbid fear of directly financing fiscal deficits. But this “no monetisation” creed sits ill with the $1 trillion or so of public debt - roughly a fifth of the Japanese GDP and about 14 percent of the net outstanding public debt - which it has already turned into money. The next BOJ governor, who will take over when the incumbent Masaaki Shirakawa steps down on March 19, should be more realistic.

The BOJ owns about $1.3 trillion in government bonds, which it has paid for by creating money. Of this money, about $375 billion is voluntarily held by banks as excess reserves. If banks suddenly find a more exciting use for these funds, the BOJ will be forced to raise compensation on excess reserves from its present level of 0.1 percent. And if that is not enough, the central bank will have to sell liquid government bonds in the market and extinguish an equivalent amount of money.

But the private sector has no control over the remaining $1 trillion or so of public debt owned by the BOJ. On the central bank’s balance sheet, these assets are backed by three near-permanent liabilities: currency issued by the central bank; zero-interest balances banks are required to keep with the monetary authority, and the BOJ’s capital and loss reserves.

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