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Japan’s Accounting Problem

TOKYO – Over the next few years, it will become obvious that the Bank of Japan (BOJ) has monetized several trillion dollars of government debt. The orthodox fear is that printing money to fund current and past fiscal deficits inevitably leads to dangerous inflation. The result in Japan probably will be a small up-tick in inflation and growth. And the financial markets' most likely reaction will be a simple yawn.

Japanese government debt now stands at more than 230% of GDP, and at about 140% even after deducting holdings by various government-related entities, such as the social-security fund. This debt mountain is the inevitable result of the large fiscal deficits that Japan has run since 1990. And it is debt that will never be “repaid" in the normal sense of the word.

Figures provided by the International Monetary Fund illustrate why. For Japan to pay down its net debt even to 80% of GDP by 2030, it would have to turn a 6%-of-GDP primary budget deficit (before interest payments on existing debt) in 2014 into a 5.6%-of-GDP surplus by 2020, and maintain that surplus throughout the 2020s.

If this was attempted, Japan would be condemned to sustained deflation and recession. Even a modest step in that direction – the sales-tax increase of April 2014, for example – produced a severe setback to economic recovery.