Wednesday, May 30, 2012

"if thy right hand offend thee, cut it off" - New Financial Scheme

Paddy Fields and a Park around Tokyo

New Financial Scheme

The Japanese Government has issued a huge amount of bonds, since its tax revenue cannot cover expenditures.

The scale of the outstanding bonds reaching about 790 trillion yen or $1 trillion requires Japan to adopt a new paradigm of finance, though assets of Japan can still well cover this liability.

In any country, the government collect tax as a resource for enforcement of the budget.  If the government spend more or less in accordance with an increase or a decrease of tax revenue, its financial condition is well balanced without deficits.  But, in most cases, an amount of expenditures increases steadily while tax revenues do not grow or even fall due to recession or deflation.  Therefore, the government has to issue and sell bonds to collect or borrow money from its citizens or foreigners.

As for Japan, about 95% of government bonds have been purchased by Japanese citizens, Japanese businesses, Japanese financial institutions, etc.  So, it is different from Greece.  And Japan has of course its own currency the yen that is highly appreciated in market.  But it may be time to propose a new financial scheme for Japan which is very unique with a large size and high quality of industrial capability unlike any other countries.

1.  The Government sells bonds to buyers in the private sector.

2.  The buyers in the private sector sell the bonds to the Bank of Japan (central bank).

3.  The Government refunds the bonds with government notes as the Government has a right to issue its own paper money (like the central bank).

4.  The Bank of Japan buys the US dollar or other foreign currencies with the yen backed by the government notes it has received from the Government in exchange of the government bonds.

5.  Finally the Government can decrease its deficits.  The public dos not have to pay more tax to the Government.  The central bank can maintain its balance sheet with the US dollar as long as the value of the yen is kept reasonably being backed up by the strong Japanese industry.  

6.  Subsequently the yen is expected to get weak to a reasonable level, thus driving Japanese export more.  The value of Japanese government bonds might fall but the state of economy supported by less tax will compensate it. And eventually deflation Japan has suffered for decades will be conquered; moderate inflation will expand Japanese GDP.
Yearly Issuance of Japanese Government Bonds by their Type
 (Unit: trillion yen or $12.5 billion)

(to be continued...)

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Mat 5:30 And if thy right hand offend thee, cut it off, and cast it from thee: for it is profitable for thee that one of thy members should perish, and not that thy whole body should be cast into hell.