When They Introduced An Even Longer Gov’t Bond

If you tally up the amount of local government debt and add it to the total owed by Japan’s central government, at the close of fiscal year 1991 it wasn’t too bad. The Japanese had always been fiscally responsible especially when compared to any of that nation’s big economy peers. In those early days of the “lost decade”, the balance was about ¥275 trillion and in terms of total gov’t debt to GDP it ended up being a bit less than 60%.

The Japanese government then spent the next few years trying to get the economy back on track using the (same) Keynesian playbook. Lots of central government spending on whatever doesn’t matter exactly what because to orthodox Economists all that matters is “aggregate demand.” Just do things for the sake of doing things; build some useless pyramids in the desert, if you have to.

In Tokyo, officials more than obliged. By the end of FY1996, gov’t debt (central & local together) outstanding had ballooned to just about ¥450 trillion, a touch more than 87% of (stagnated) GDP.

Another “unexpected” recession began toward the end of ’97, to which the central government responded by going bigger (and engaging the central bank to an even greater extent). Huge. Massive fiscal packages beyond prior bounds. And though the headline figures that were announced to the public were themselves puffed-up, authorities weren’t being shy in ’98 and thereafter. By FY1999, the debt balance had climbed to more than ¥600 trillion (118% of GDP).

In terms of issuance, the JGB’s had been less than 40% of the market in 1990. By 1999, these were then 68% of what was being sold.

That’s not all; there were other debts to consider, including Japan’s “second budget” which consisted of the activities undertaken by the FILP. In other words, what critical mainstream Economists would later call in the next decade “money-financed fiscal expansion” in addition to all this regular “bond-financed fiscal expansion.”

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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