The head of the Bank of Japan in 2011 raised the alarm about the idea of underwriting Japanese government bonds to support reconstruction from the devastating earthquake and tsunami that year, saying such a practice will eventually become "unstoppable," minutes showed Friday.
Masaaki Shirakawa, who was BOJ governor, warned that the central bank directly financing government spending would risk a sharp rise in inflation and undermine fiscal discipline, citing Japan's past experience decades earlier, according to the minutes of an April 6-7 policy meeting in 2011.
Mindful of the danger of resorting to debt financing even as a "temporary" step, Shirakawa said in retrospect, "The underwriting (of government debt) started as such, because doing so was deemed convenient. But because of this, it became unstoppable and led to a sharp currency depreciation or inflation," the minutes showed.
The governor's warning came as ruling party lawmakers were floating the idea that the BOJ should come to the aid by underwriting government debt in the aftermath of the disasters that required massive spending.
Japan had debt more than twice the size of the economy in 2011 and the situation remains the same now. The country's law prohibits the BOJ from directly financing the government.
Under the current governor Haruhiko Kuroda, who took over from Shirakawa in 2013, the BOJ has been gobbling up massive amounts of Japanese government debt in recent years but via the market.
In the same April 2011 meeting, another member said the BOJ should continue to make it clear that debt monetization would "never be an option," noting that the public would suffer from inflation. Shirakawa repeatedly dismissed the possibility of underwriting government debt in public remarks later.
Japan had a bitter experience decades earlier. In the 1930s, then Finance Minister Korekiyo Takahashi advocated more fiscal spending after the country was hit by a severe deflation, urging the BOJ to underwrite government debt. The debt held by the BOJ increased just as war-related spending rose, paving the way for inflation in the postwar era.
The BOJ's complete minutes of policy-setting meetings in the following months of the disasters on March 11, 2011 reveal how the central bank scrambled to provide ample liquidity to calm market jitters and prevent corporate and consumer sentiment from worsening.
The BOJ quickly responded to the crisis at a policy meeting on March 14, 2011, by expanding its program to buy government bonds and risky assets like exchange-traded funds by 5 trillion yen ($45 billion) to 10 trillion yen.
The magnitude-9.0 quake and ensuing tsunami hit wide areas in northeastern Japan, leaving some 22,000 people dead or unaccounted for and causing meltdowns at the Fukushima power plant in the worst nuclear crisis since Chernobyl. The calamity disrupted supply chains in a serious blow to manufactures like Toyota Motor Corp.
It triggered sell-offs in Japanese shares and sent the yen surging to a fresh post-war high of 76.25 yen against the U.S. dollar at the time, leading to coordinated currency interventions on March 18, 2011, by central banks of Group of Seven industrialized nations to weaken the Japanese currency.
At the March 14 meeting, one policy board member said that the step was a must to prevent sentiment from deteriorating "at any cost" and another stressed the need to focus more on risky assets while keeping a watch on stocks and "unstable" moves in the currency market.
Shirakawa told the meeting that the BOJ's easing should be interpreted as a "preemptive" step to avoid heightened risk aversion and worries from hurting economic activity.
"We need to make sure that our own action will not lead to perceptions that the reality is so dire (that the step has been taken) and inadvertently dampen economic activity," he was quoted by the minutes as saying.
Japan's economy has since recovered from the 2011 quake but is now on shaky ground amid the coronavirus pandemic. The Tokyo Olympics, from July 23 to Aug. 8, are meant to showcase the country's recovery from the disaster, yet they are being overshadowed by the COVID-19 crisis.
After aggressive easing, the BOJ owns about 45 percent of Japanese government bonds and is now a top shareholder of Japanese stocks as a result of ETF purchases that initially began under Shirakawa and sharply increased under Kuroda, the current governor.
The BOJ releases fuller minutes of policy meetings a decade after they were held. The latest batch covers meetings in the six months between January and June 2011.