Alan Kohler has written a thought-provoking piece suggesting Japan’s embrace of modern monetary theory (MMT) since 2001 might be the model for Treasurer Jim Chalmers meeting future social needs without raising taxes. MTT involves a central bank funding its government’s annual deficits and build-up of debt by printing digital money.
See Alan’s piece here.
As someone who spent his Treasury career trying to balance government budgets, I find this heresy but recognise that quantitative easing (QE) – which is MMT in disguise – became de jour monetary policy in developed economies in response to the Covid-19 pandemic. Central banks created money to buy government bonds to enable governments to borrow a lot more at little or no cost.
MMT was embraced by Japan in 2001 to overcome a “lost decade” of economic stagnation following the bursting of its property price bubble in 1992.
Forty three percent of its public sector debt was funded by the central Bank of Japan (BoJ) with the rest by private banks and trusts. And seventy per cent of government bonds were bought by the BoJ
The chief downside to this policy was that its economic stagnation did not end. Also, half of its tax revenues go on debt charges squeezing out other government payments. But presumably the BoJ returns much of its bond income to the government in the form of dividend distributions.
The upside of MMT as Kohler argues is that Japan has superb infrastructure, affordable housing, low unemployment, and notwithstanding printing money on a grand scale has kept both price inflation and interest rates low.
Japan has got away with MMT because its households and corporates prefer to invest their savings locally even though overseas cash accounts, bonds, property, and shares have offered higher returns.
This home bias can’t be due to a fear of exchange rate losses on overseas investments because the Yen has not appreciated against the USD since 2001. All I can be put it down to is Japanese investor patriotism.
Following the global financial crisis of 2008 most developed countries caught the Japanese disease and slipped into secular stagnation with low economic growth, low inflation, and low interest rates. But like Japan they also enjoyed low unemployment.
This all ended with the worldwide onset of Covid-19 in February 2020 followed by massive government and central bank stimulus which combined with locked-down production triggered high inflation. Central banks reacted to run-away inflation by swapping bond selling (Quantitative Tightening) for bond buying (QE) and jacking up interest rates.
If the world returns to secular stagnation after its current bout of price inflation, then QE (MMT by another acronym) might be reinstated by central banks to avoid interest rates climbing higher due to growing government deficits and debt.
The question is whether that would be compatible with low inflation like Japan or trigger hyperinflation like Venezuela and Argentina.
Percy Allan AM was Chair, Evidence Based Policy Research Project (2018-2022). He is also a Visiting Professor at the Institute for Public Policy and Governance, University of Technology Sydney. (Former Secretary, NSW Treasury and Chair, NSW T-Corp 1985-1994 and Chair, NSW Premier’s Council on the Cost & Quality of Government, 1999-2007)
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