In my previous post, I explained that the government can create as much money as it wants if it truly puts its mind to it. It is common sense that as long as the materials are available, you can print as many banknotes or mint as many coins as you need. As for deposits—which are merely digital information—they can be created simply by typing numbers on a keyboard. This profit the government gains from issuing currency is called seigniorage. The strict definition is a bit complex and often a target for nitpicking by austerity hawks, so I won’t dive deeper into the technicalities here.
If the government were so inclined, it could amend the law and issue a 100-trillion-yen coin. You might think, “No one would ever accept that!” But there is one entity that can: the Bank of Japan (BoJ). They would simply credit 100 trillion yen to the government’s current account. This illustrates just how absurd the “lack of funding” debate really is. If there isn’t enough money, you simply create it.
In reality, the government raises funds by issuing government bonds rather than coins, which makes it look like borrowing. While it is technically correct that bonds differ from coins because interest is involved, consider this: when the BoJ buys government bonds, the interest paid by the government is returned to the national treasury as “contributions to the treasury” (kokko-nofukin). Effectively, no interest is paid. As for the principal, as long as a policy agreement is in place with the BoJ to keep rolling over the debt, it never actually has to be repaid.
In essence, a 100-trillion-yen coin and 100 trillion yen in government bonds are fundamentally the same. My point is this: Because the government can create money without limit, it is a total fallacy to view the issuance of government bonds as “debt.” (I will discuss in a future post why the government goes through the trouble of issuing bonds instead of just minting coins.)
The True Constraint: Inflation, Not Debt
On the other hand, as I’ve stated before, fiscal discipline is important. So, when would we hit a limit on money creation? It happens when the amount of money circulating in the market becomes excessive relative to the actual goods and services available, leading to—or threatening to lead to—hyperinflation.
This is why inflation forecasts are what truly matter. Debates about “debt per capita” or “debt-to-GDP ratios” are utterly meaningless. I will discuss which indicators we should actually prioritize at another time.
Conversely, if we over-tighten the money supply due to an irrational fear of hyperinflation when no such threat exists, the inflation rate will drop below desirable levels, eventually leading to deflation. This is exactly what happened to Japan after the bubble burst.
A Note on the 100-Trillion-Yen Coin
I used the example of a 100-trillion-yen coin because, under current law, the government can issue coins but not banknotes. Economically speaking, a 100-trillion-yen banknote would serve the same purpose, but austerity advocates love to drag out laws and accounting rules to counter this point. Again, if the laws or accounting systems are the problem, we should simply change them. While I may go into more detail on this later, it isn’t the core issue.
Austerity-minded scholars often try to shroud the truth in jargon and legal frameworks that the general public isn’t familiar with. When you see such rhetoric, rest assured—I will be here to provide a firm rebuttal.
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