Japan may be moving towards monetization of debt

10 May 2012 by Jim Fickett.

Last month the Japanese Ministry of Finance published its quarterly newsletter, with most data updated through Q1.

There was no change in projected debt levels through 2013, nor in current, very low interest rates. The most interesting change was in the pattern of ownership of Japanese Government Bonds. Many observers have predicted that with an aging population, households and pension funds would be net sellers of JGBs and, indeed, households, pension funds, and public pensions together have gone from holding 21.1% of all JGBs in Dec 2009, to 17.2% in Sep 2011, to 16.8% in Dec 2011. The central bank has taken up some of the slack, with ownership rising from 7.4% in Dec 2009 to 8.5% in Sep 2011, to 9% in Dec 2011.

Officially, recent Bank of Japan purchases were intended to provide quantitative easing, but I wonder whether, in fact, the central bank is not being forced into making up for lack of demand. If so, this would be the beginning of a very slippery slope of monetizing the debt, i.e. replacing borrowing with money printing. There has been a lot of moaning about Japan's deflation, but there are much worse alternatives.