Bank of Japan Governor Masaaki Shirakawa is under fire for refusing to consider 1930s-style purchases of government bonds to fund reconstruction from the nation's record earthquake.
"If this isn't a special situation, what is?" Kozo Yamamoto, a Diet member of the opposition Liberal Democratic Party, said in an interview this week. Yamamoto advocated a Y20 trillion reconstruction program funded by BOJ debt purchases. A group of ruling party lawmakers submitted a similar proposal to Finance Minister Yoshihiko Noda on March 18. . . . "No doubt Mr Shirakawa has been going through the disastrous history of the BOJ's open-ended and unfunded commitment to 'Earthquake Bonds' after the 1923 Big One. What happened that time was that BOJ was only partially indemnified against losses on those bonds, and as they financed - among many many other things - an astonishing loss of inventory, the losses on the bonds were far higher than anyone had dared anticipate or envisage. As a result, the Earthquake Bonds and associated losses cluttered up the financial system for years, and eventually brought down the banking system in the 1927 crash. See Parts 1, 2, 3 below.
The difference is that this time, even right from the off, there seems to be no suggestion that BOJ will be indemnified in any way against losses.
So we'd better start asking: what happens if a central bank gets into difficulties? The answer, as the Philippines central bank will tell you, is that you recapitalize the central bank by widening banking spreads. Another reason to believe that the financial upshot of the earthquake will be a reform of Japan which re-introduces and re-invigorates the financial repression with which Japan is so familiar.
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