RIETI Report September 2015

Seigniorage for the Government and the Bank of Japan is not a Tool for Fiscal Reconstruction

The Bank of Japan (BOJ)'s massive quantitative and qualitative easing (QQE) has served as a scheme that brings financial gain to the government and the BOJ in two ways. In addition to suppressing a rise in the debt servicing costs by lowering interest rates, certain financial gain can be realized by increasing the money supply. The latter is called "seigniorage," and it has been argued that the government can rebuild its finances by using seigniorage although achieving this without causing pain will be quite difficult. In the September issue of the RIETI Report, we present Consulting Fellow Kazumasa Oguro's column "Seigniorage for the Government and the Bank of Japan is not a Tool for Fiscal Reconstruction."

Oguro introduces three definitions of seigniorage. The BOJ posted significant revenue from seigniorage for FY2013 and 2014, but with yields on government bonds on a downward trend due to strong demand driven by its massive purchases, it has nearly used up its capacity for increasing seigniorage through monetary easing. Oguro then looks at historical episodes of excessive monetary easing, showing that a permanent increase in the monetary base combined with mounting government debt is often a recipe for eventual hyperinflation. Fiscal reconstruction by means of seigniorage or inflation tax is just another form of tax-increasing policy, which is unfair to households that are ill-equipped to guard against the impact of sudden hyperinflation. The government and ruling parties must work earnestly and steadfastly to carry out fiscal and social security reform.

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Seigniorage for the Government and the Bank of Japan is not a Tool for Fiscal Reconstruction

For Japan, where the government's debt is growing progressively, the events in Greece are not a "fire on the other side of the river" as its fiscal health could take a direct hit from an increase in the interest rates on Japanese government bonds (JGBs). At the moment, however, JGB interest rates are stabilizing at low levels. This is largely attributable to the effects of the Bank of Japan (BOJ)'s massive quantitative and qualitative easing (QQE).

Specifically, the BOJ has been purchasing long-term government bonds from the private sector to expand the monetary base by 80 trillion yen per year with an aim to achieve its inflation target of 2%. The monetary base can be measured in terms of the quantity of (narrowly defined) money supplied by the BOJ to the market. Currently, the BOJ is issuing money at a rapid pace.

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