“We are determined to protect the Japanese economy”, Taro Aso said Wednesday, as Japan moved to pass another extra budget. “We are facing a crisis that goes beyond the scale of the Lehman shock”.
The latest pandemic relief package from Japan totals 117 trillion yen. That’s a familiar number. It comes just a month after an 8.9 trillion yen addition to the first extra budget brought total COVID-19 relief spending to 117 trillion yen by April 20.
So, the new package amounts to a doubling of that, for a total of 234 trillion yen in spending to help the world’s third-largest economy overcome a deep recession.
You’re reminded that Q1’s 3.4% output decline (which was actually a better-than-expected print) came on the heels of a rough Q4, marred by the tax hike and a typhoon.
With a Q1 contraction now in the books and Q2 set to be horrific for obvious reasons, Japan is set for three consecutive quarters in contraction.
As far as the breakdown of the latest stimulus package goes, 33 trillion of the 117 trillion will go towards direct spending.
Specifically, Japan will spend nearly 12 trillion yen doling out loans to small- and mid-sized businesses; three trillion for doctors, nurses, medical supplies, and vaccine development; two trillion for rent subsidies; nearly 5 trillion for payouts to low-income single parents, artists, farmers and schools; and 10 trillion for an emergency reserve.
The balance (i.e., the difference between the headline figure and the direct spending) will go to state-backed banks for relief to virus-hit firms.
The second extra budget will be funded in part by some 60 trillion yen in new debt issuance. For this fiscal year, Japan now plans to borrow 212 trillion yen. The figure shows how this has evolved since December.
Bloomberg Economics preemptively calls the expected surge in the country’s debt-to-GDP ratio (already the highest in the developed world) “mind-spinning”.
An article out Wednesday reminds you that “the government’s extra spending comes amid reassurances from the Bank of Japan that it won’t allow bond yields to rise”.
At this point, I think everyone gets the message, as it’s more explicit than it’s ever been thanks to the COVID crisis.
When central banks are guaranteeing they will buy as many bonds as it takes to ensure borrowing costs do not rise for the sovereign at a time when debt issuance is ballooning into the many trillions, we are squarely in government financing territory.
More to the point: You can stop it with the “we won’t try MMT” narrative. That battle is lost. We are there. And it’s just a matter of time before central banks cut out the superfluous middleman and buy directly from the government.
Eventually, governments will likely consider simply canceling the debt held by their own central banks, but that’s a story for another time.
Last month, the BOJ effectively removed the cap on bond buying. Although yield curve control has resulted in an effective taper in the pace of JGB buying by the central bank, the ownership breakdown obviously shows Kuroda has cornered the market.