A Benjamin Cole post
Under the stalwart but still cautious leadership of Governor Haruhiko Kuroda, the Bank of Japan has followed a path of quantitative easing, and then negative interest rates, in a mixed battle against deflation and a soaring yen.
Yet in mid-August the yen rose to less than 100 per U.S. dollar, from 120 at the start of the year. Meanwhile, Japan plays peek-a-boo with deflation.
And now the Bank of Japan may be running out of Japanese government bonds to buy. With the BoJ having purchased one-third of the national bonds outstanding, the largest banks in Japan say they are running out of inventory.
Moreover, the BoJ has been buying exchange-traded funds (ETFs). “Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings,” reported Bloomberg recently.
No doubt, critics will cite Japan as an example that QE does not work. But we don’t know the counter-factual, and it is probable Japan would have sunk into recession-deflation without QE.
But perhaps the long-term critics of QE, who have predicted inflationary holocausts for years, finally have a real issue: The BoJ will run out of securities to buy. Although in a laughable twist, the BoJ will run out of securities to buy long before it “runs of out ammo,” says one of the other long-standing if insane critiques of QE. The BoJ has unlimited ammo.
Sikorsky, Huey, Chinook
The Bank of Japan could sidestep the whole problem of building a balance sheet by instead engaging in “helicopter drops” also called “money-financed fiscal programs.”
Though rarely discussed in U.S. macroeconomic circles, Japan used helicopter drops successfully in the Great Depression, under the leadership of Finance Minister Korekiyo Takahashi. While American and Europe remained mired in depressions until WWII, Japan’s economy grew solidly from 1932 to 1936, when Korekiyo was assassinated by militarists. The island economy kept growing thereafter, but ran into inflation, as the soldiers kept printing money to finance wars.
Conclusion
Who in 2008 could have predicted that central-bank quantitative easing programs on three continents would be met by whimpering bond markets, zero-lower bound and borderline deflation through much of the developed world?
Who can deny that the Bank of Japan has paid off one-third of the once-towering Japanese national debt, with no inflationary consequence? So what is the importance of the national debt in this new context?
What recourse has the Bank of Japan now, but to ponder helicopter drops?
Orthodoxy and convention have nearly ossified the craft of macroeconomics. Practitioners genuflect to totems even as events make a mockery of the most exalted maxims.
Do the Rube Goldberg operations of the Federal Reserve, with bond-buying and selling, and reverse repos, and interest on excess reserves, and erratic posturing by various unelected regional bank presidents, make more sense than a simple program of money-financed fiscal programs?
PS A real world experiment:
It is quite unfortunate that Schacht’s lesson was lost while Eucken’s paradigm carried the day. Schacht’s programme resembles a variation of the ‘helicopter money’ policy and its free-lunch effects (Bossone 2016), which several economists today consider an effective demand management tool for fiscally constrained economies trapped in deep depression.
Historinhas 
How is it that the BoJ, having bought just one-third of the Japanese government bonds outstanding, now can’t buy any more? Are the other two-thirds not available for purchase *at any price*? Who is holding them, and what are the holders up to?
(I suppose there would be political repercussions, both domestic and international, if the BoJ bought U.S. and European government bonds.)
Philo–Perhaps the BoJ can buy more Japan bonds. They could buy more bonds globally too. After all, the People’s Bank of China owns a few trillion dollars of US Treasuries.
I confess I am fascinated by the manner in which central banks appear to be able to liquidate national debts without inflationary consequences.
But then perhaps a better approach is too never generate that debt in the first place in simply do helicopter drops to start with.
Thanks for reading!
A lot of the bonds will be held as assets by life and pension companies as a necessary match for their long term liabilities.
I was simply reacting to this paragraph: “And now the Bank of Japan may be running out of Japanese government bonds to buy. With the BoJ having purchased one-third of the national bonds outstanding, the largest banks in Japan say they are running out of inventory.” Even if the large Japanese banks are out of Japanese government bonds, there are still plenty of other holders from whom purchases could be made; the BoJ is far from “running out.”