“Issuing government bonds is borrowing money that must be repaid someday”—this line of reasoning remains incredibly prevalent. I will not nitpick who said what, but the old media is causing a massive uproar about rising interest rates and fiscal anxiety. I find this level of biased reporting truly abysmal. Outlets like the Nikkei Shimbun and Toyo Keizai, which pose as “respectable economic media,” are particularly malicious. While I feel their influence has declined significantly, reading the Yahoo! News comments on certain Toyo Keizai articles makes me realize that many people are still swayed by the old media. This realization prompted me to write this blog.
The issuance of government bonds is essentially the supply of money tailored to the actual state of the economy. If this is not done sufficiently, demand deficiency will persist. Japan’s economy has stagnated for 35 years precisely because it has continued to undersupply money. Money itself has almost no physical value; it is merely scraps of paper (banknotes), pieces of metal (coins), or just numbers displayed on a screen (deposits). By having the central bank purchase government bonds, the government can procure money without limit. There is no way the outstanding balance of government bonds itself could ever become a factor that constrains expenditure.
In fact, looking at the long term, there is not a single government in the world that is actually “repaying” (reducing) its debt denominated in its own currency (to be precise, there are a few highly specific exceptions). The U.S. and U.K. governments, in particular, have increased their debt to an astonishing degree. Why on earth must only the Japanese government repay its debt, and for what reason? It is only natural to roll it over. Note that debt denominated in foreign currencies is a different story, as it must be repaid if demanded by the lender. However, Japan is the world’s second-largest net external creditor nation with a surplus of foreign currency; there is absolutely no need for concern.
Of course, if government bond issuance is overdone, it could lead to hyperinflation. While it is possible to absorb money through tax hikes to counter this, that is not the standard approach, because fiscal policy cannot be changed flexibly. For example, consider how long it takes from the start of a discussion on raising the consumption tax rate to its actual implementation—it can take years. This is why interest rate hikes are used instead. Readers of this blog likely have a proper understanding of credit creation, so this logic should be clear.
Tax hikes or similar measures only become necessary in cases such as the following:
- Raising taxes on alcohol and tobacco to promote national health and reduce medical costs.
- Implementing financial taxes to narrow the gap between the rich and the poor.
- Raising gasoline taxes to reduce carbon dioxide emissions.
- Increasing out-of-pocket medical expenses to address a chronic shortage of doctors.
A certain world-famous business leader remarked to the effect that Prime Minister Takaichi, who advocates for fiscal expansion, “doesn’t understand the economy” and will eventually be forced to raise taxes on large corporations and the wealthy. However, if one operates on the premise that the government does not “repay” the money, tax hikes are not necessarily required. I believe the Takaichi administration aims not to snatch money away from big business or the wealthy, but first to raise the floor of the general public’s income through fiscal expansion. In other words, the goal is to raise real wages.
The debate over raising the public’s income through fiscal expansion and the argument that the tax burden on large corporations and the wealthy is too light are two separate discussions. Since they are separate, we can reconsider the latter once real wages have begun to rise. A conclusion that no implementation is necessary is also a distinct possibility.
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