Abeconomics, Takahashi and Japan’s deflation

by George Hatjoullis

Korekiyo Takahashi (1854-1936)

Korekiyo Takahashi (1854-1936) (Photo credit: Wikipedia)

Kikuo Iwata, Deputy Governor of the Bank of Japan, has made some significant comments at a symposium in honour of Korekiyo Takahashi (http://bit.ly/1aatxII) the architect of Japan’s recovery from the Great Depression. The key aspect of these brief comments is the reference to the underwriting of government debt by the Bank of Japan between 1931 and 1936. This underwriting is tantamount to deficit financing of government debt which is anathema in policy circles because of the inflationary risks.

Of course, as I have already explained in my first Abeconomics blog, Abeconomics, deflation and the Japan conundrum (http://bit.ly/WVnCVP), deficit financing is the appropriate monetary policy tool in a structural deflation and Japan is certainly in such a deflation. Moreover, the inflation risks only arise if the policy is continued (for political expediency) after the deflation has ended. This is the startling aspect of Iwata’s comments. He asserts that Takahashi’s policy in the 1930s was correct and that the hyperinflation that followed arose from his assassination ( by an expansionist military) and the continuation of the policy when it ceased to be appropriate.

The Iwata comments may imply that some version of the underwriting of government debt, such as debt cancellation, may be on the cards. My original blog argued that it would come to this at some point and perhaps sooner rather than later. The implication for financial markets would be dramatic. Rising Japan Government Bond yields, a rapid further weakening of the Yen and surge in stocks for one thing. The issues are all covered in the Abeconomics series of blogs.