Global Macro Monitor

The WSJ does a good explaining what is driving the Yen and seems to agree with us that there is a huge difference between quantitative easing to stimulate the economy versus monetizing bad government debt for which there is no demand.

The Germans seem to be the only people on earth who fully understand this and recognize that money demand could collapse if markets realize and begin to internalize the difference.  This is surely not the type of inflation Japan wants.   Or maybe it does?

We don’t think Japan is there just yet but it is inevitable, in our opinion.   Ditto for the U.S. unless Congress begins to address the structural deficit and the country’s debt problem.

The Wall Street Journal writes,

The distinction—between buying bonds to stimulate the economy and doing so to bail out free-spending politicians—is important to economists and central banks.

The controversial practice of “monetizing the debt” is considered dangerous because it could encourage profligate governments to keep borrowing, risk setting off runaway inflation, and undermine central-bank independence by lashing monetary policy to political spending decisions. The BOJ says it is doing this to help end a long period of deflation, not to support the government. It has resisted taking this step for years…

The BOJ stirred questions about debt monetization after its Feb. 14 policy meeting, when it significantly expanded its 1½-year-old asset-buying program. The total amount of the central bank’s planned government debt purchase through the end of this year jumped to nearly ¥38 trillion ($465 billion), an amount roughly equal to all the new bond issuance planned by the Japanese government for the period.

This is the first time since the program began in October 2010 that central-bank-asset purchases came anywhere near the amount of government new issuance.

And this from a JP Morgan analyst in the same article,

The BOJ stirred questions about debt monetization after its Feb. 14 policy meeting, when it significantly expanded its 1½-year-old asset-buying program. The total amount of the central bank’s planned government debt purchase through the end of this year jumped to nearly ¥38 trillion ($465 billion), an amount roughly equal to all the new bond issuance planned by the Japanese government for the period.

This is the first time since the program began in October 2010 that central-bank-asset purchases came anywhere near the amount of government new issuance.

Finally,

If any central bank had incentive to monetize the public debt, it would seem to be the BOJ. Japan’s outstanding government borrowing is forecast to climb to 220% of its gross domestic product this year, according to the Organization for Economic Cooperation and Development, compared with the 181% Greece faced before its latest debt restructuring deal, and 104% for the U.S.

(click here if charts are not observable)