Desmond Lachman writes in responding to the FT editorial on the BoJ's unprecedented moves. But naturally, if you're writing in from the right, then you just have to play the debt card which he does immediately, but not before accusing the editorial of understating the downside risks to the BoJ's moves:
"With a gross public debt to gross domestic product ratio in excess of 240 per cent, and with a primary budget deficit of 7 per cent of GDP, Japan’s public finances are clearly on an unsustainable path"
But unsustainable path to where? Till the vigilantes strike? What's the alternative? Slash spending and spiral downwards into contraction upon contraction? Impose a dose of severe euro-style austerity till the debt level drops? What about some more deflation? What does that do to the real debt burden?
Lachman goes on to write:
"Equally troubling is the rapid rate at which Japan’s population is ageing and the correspondingly rapid rate at which its domestic savings rate is declining. This has to raise serious questions about how the Japanese government will finance itself over the longer haul without permanent resort to the BoJ’s printing press."
Fair enough, no one's claiming that Japan's demographics are in its favor but from a savings-investment dynamic, shouldn't this sort of unconventional and aggressive monetary expansion help out a little?
He then goes on to talk about the yen's depreciation and how, coupled with inflation (towards the 2% target), it would lead to exit-problems for the BoJ. Also, with a depreciating currency and rising inflation, investors will begin to find JGBs highly unattractive and the love-affair will soon end (cue the vigilantes!)
Anyway, what does Lachman advocate?
"...a medium-term strategy to place the country’s public finances on a very much sounder footing, there is the all-too-real risk that the BoJ is leading the country down the well-trodden path of very much higher inflation"
What kind of consolidation does a "medium-term" strategy involve? I wouldn't be one to deny that Japan needs some sort of fiscal initiative. Short-term? No! Medium-term? Long-term? That's the grey area. Does medium-term imply action now? Or after some effects of the monetary expansion have been seen? Moreover, with low growth (but also low interest rates!), would there really be a significant impact on the debt-GDP ratio?
I'm not sure. No one's saying this is a perfect and optimal solution but you can be sure the BoJ's probably warned themselves more times than others have warned them before setting off on this untrod path. And each time they warned themselves, they probably asked, "What's the other alternative?"
Exactly.
"With a gross public debt to gross domestic product ratio in excess of 240 per cent, and with a primary budget deficit of 7 per cent of GDP, Japan’s public finances are clearly on an unsustainable path"
But unsustainable path to where? Till the vigilantes strike? What's the alternative? Slash spending and spiral downwards into contraction upon contraction? Impose a dose of severe euro-style austerity till the debt level drops? What about some more deflation? What does that do to the real debt burden?
Lachman goes on to write:
"Equally troubling is the rapid rate at which Japan’s population is ageing and the correspondingly rapid rate at which its domestic savings rate is declining. This has to raise serious questions about how the Japanese government will finance itself over the longer haul without permanent resort to the BoJ’s printing press."
Fair enough, no one's claiming that Japan's demographics are in its favor but from a savings-investment dynamic, shouldn't this sort of unconventional and aggressive monetary expansion help out a little?
He then goes on to talk about the yen's depreciation and how, coupled with inflation (towards the 2% target), it would lead to exit-problems for the BoJ. Also, with a depreciating currency and rising inflation, investors will begin to find JGBs highly unattractive and the love-affair will soon end (cue the vigilantes!)
Anyway, what does Lachman advocate?
"...a medium-term strategy to place the country’s public finances on a very much sounder footing, there is the all-too-real risk that the BoJ is leading the country down the well-trodden path of very much higher inflation"
What kind of consolidation does a "medium-term" strategy involve? I wouldn't be one to deny that Japan needs some sort of fiscal initiative. Short-term? No! Medium-term? Long-term? That's the grey area. Does medium-term imply action now? Or after some effects of the monetary expansion have been seen? Moreover, with low growth (but also low interest rates!), would there really be a significant impact on the debt-GDP ratio?
I'm not sure. No one's saying this is a perfect and optimal solution but you can be sure the BoJ's probably warned themselves more times than others have warned them before setting off on this untrod path. And each time they warned themselves, they probably asked, "What's the other alternative?"
Exactly.
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