Raw Japan

Slices of Japanese business, politics and life

The allure of free money

February 5, 2009

People say there’s no such thing as a free lunch. But in theory, a government can have one, some economists and Japanese politicians say, if it wishes to save the economy from deflation and recession. It should just print money and then spend it.

In the past few weeks, some members of Japan’s ruling coalition as well as economists have proposed such a move as the spectre of deflation looms in Japan, now amid what is likely to be its longest economic contraction in modern times.

And the idea, outlandish as it may sound, does not come from fringe economists — Nobel-laureate Joseph Stiglitz  proposed this remedy in 2003 as a way to bring Japan out of deflation.


Government spending would make up for the sharp fall in demand from the private sector, while printing more money could cause a minor loss in public confidence in money — a good thing.


Countries normally finance spending by issuing debt, effectively passing on the cost to future generations. But by simply printing money, the government can save the economy at no cost, proponents say.




In fact, such a proposal can be seen as yet another variation of unconventional monetary easing. Both the Bank of Japan and the U.S. Federal Reserve are seeking new ways to stimulate the economy as interest rates have been brought down near zero and options wane.


The BOJ has already employed various unorthodox measures including buying commercial paper, corporate bonds and stocks, and although not openly receptive this week, the government printing money would be similar to the BOJ underwriting of government debt.

Many policymakers think trying to intentionally reduce confidence in the currency is likely to prove too strong a medicine or lead to hyper-inflation.


Zimbabwe, which revalued by lopping off 12 zeros off its battered currency as official inflation hit 231 million percent, is a prime example.


“If money fell from the sky, I guess we would spend it, but this idea is completely out of line with current fiscal and monetary policy,” Economist Minister Kaoru Yosano said this week.


But in fact Japan has tried this road in the past, financing much of its war effort by making the BOJ underwrite government debt, leading to runaway inflation after Japan’s defeat.

Intentionally trying to damage confidence in currency smacks of irresponsible policy. Another Nobel-laureate, Paul Krugman, said a decade ago that the BOJ needed to find a way to “credibly promise to be irresponsible to stop deflation”.


So far, though, no one has found a practical way to do that. Keep your eye on the presses. 


Photo credit: REUTERS/Jo Yong-Hak

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