Japanese Monetary Policy: That Which Is Unsustainable Will Not Be Sustained

On Dec. 1, 2022, Scott Minerd, Chairman of Guggenheim Investments and Guggenheim Partners Global Chief Investment Officer, delivered a keynote address at the Program on International Financial Systems 25th annual Japan-U.S. Symposium, “Symposium on Building the Financial System of the 21st Century: An Agenda for Japan and the United States.” Participants at the Washington, DC, event included Haruhiko Kuroda, Governor of the Bank of Japan, Masato Kanda, Vice Minister of Finance for International Affairs of Japan’s Ministry of Finance, Nellie Liang, Undersecretary for Domestic Finance of the U.S. Department of Treasury, other officials from the Japanese and American governments, as well as leaders from Japan’s banking and business community.

Minerd’s presentation, titled “That Which Is Unsustainable Will Not Be Sustained,” addressed the impact of rising debt levels in Japan on its economy, bond yields, and the yen, and the perils of yield curve control as a monetary policy tool. The presentation illustrates Japan’s stunning level of indebtedness after 20 years of ultra-accommodative monetary policy: At approximately 220 percent, its government debt-to-Gross Domestic Product (GDP) level is twice that of the United States, the United Kingdom and the Eurozone; the assets of the Bank of Japan (BOJ) alone are over 120 percent of GDP, dwarfing the Federal Reserve (Fed), which has assets equal to just under 40 percent of U.S. GDP; and the Bank of Japan owns almost 50 percent of its country’s outstanding government bonds, compared to the Fed which owns just 25 percent of outstanding Treasury securities. Ultra-low interest rates in Japan have kept interest expense to just under 1.5 percent of GDP, but this will increase as yields rise and GDP growth weakens. In addition, rising rates will leave the BOJ with large mark-to-market losses.

With this background, Minerd’s presentation focused on the inextricable dilemma faced by central banks that must battle inflation while coping with losses on securities in their portfolios. Nowhere is this dilemma more palpable than in the case of the Bank of Japan, which has chosen to artificially peg the yield on 10-year Japanese Government Bonds (JGBs) in its efforts to stoke inflation. Now that these efforts are bearing fruit and inflationary pressures are rising, the peg on the 10-year JGB is being exposed as an increasingly untenable policy.

The key takeaway from Minerd’s presentation is that while the BOJ’s policy moves and Japan’s fiscal situation is challenging, it is not an outlier among developed nations. Rather, it is a cautionary example for other nations that have pursued very easy monetary policy, and perhaps a harbinger of things to come.

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