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Side effects of Abenomics

The yen is depreciating rapidly. Looking at the real effective exchange rate index, which shows the true strength of the currency, it was 68.65 in May 2024. This figure has been published since 1970, and it is the lowest value in history.

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The current real value of the yen is lower than it was 54 years ago, when the exchange rate was still fixed at 360 yen to the dollar. It is no exaggeration to call it a currency crisis.

This is a side effect of the economic policy "Abenomics" implemented by the late Shinzo Abe.

Abenomics is said to be an economic policy consisting of "three arrows," but in reality there is only one. That is unprecedented monetary easing.

Unprecedented monetary easing is, specifically, the massive purchase of government bonds by the Bank of Japan. This makes it impossible to raise interest rates and makes it impossible to stop the depreciation of the yen, which is a side effect of Abenomics.

First, let's check the amount of government bonds (including treasury discount bills) held by the Bank of Japan.


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Thus, the Bank of Japan's holdings of government bonds in fiscal 2012, just before the start of Abenomics, were 132 trillion yen. After that,Abenomics was launched and the Bank of Japan purchased large amounts of government bonds, resulting in the Bank of Japan's holdings of government bonds reaching 588.5 trillion yen in fiscal 2023.

Japan's outstanding balance of government bonds (including treasury bills) is 1,224 trillion yen as of fiscal 2023, and the Bank of Japan's holdings account for about half of this.


Japan's nominal GDP in fiscal 2023 is 597 trillion yen. The amount of government bonds held by the Bank of Japan is equivalent to this.

In this way, the Bank of Japan is the only central bank in the world that holds a huge amount of government bonds equivalent to the country's nominal GDP. This is the crucial difference between the Bank of Japan and other central banks.

Currently, central banks around the world have raised interest rates compared to before in order to suppress inflation.

Central banks around the world are trying to stop inflation by raising interest rates to suppress credit creation and slow the rate of currency growth.

In such a situation, only the Bank of Japan continues its low interest rate policy, which has resulted in a large interest rate differential between the Japanese currency and other currencies, and this has been the main factor in the rapid depreciation of the yen.

This has led to a historic drop in the real effective exchange rate index. Currently, the Japanese people are suffering from rapid inflation due to the depreciation of the yen.

Bond prices and interest rates move inversely. Therefore, if interest rates are raised, the market value of government bonds will fall and large valuation losses will occur. This is an inevitable phenomenon that occurs when the low interest rate policy is stopped and interest rates are raised.

Since the Bank of Japan holds a large amount of government bonds equivalent to Japan's nominal GDP, the valuation losses associated with rising interest rates will be huge.

At the House of Representatives Budget Committee on June 22, 2024, Bank of Japan Governor Ueda said, "If interest rates in general rise by 1%, the valuation losses on the government bonds we hold will be about 40 trillion yen."

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In this way, the reason why huge valuation losses occur even with just 1% is because the amount of government bonds held is too large. This makes it appear that the Bank of Japan will fall into insolvency.

However, Article 13 of the Bank of Japan's accounting regulations stipulates that Japanese government bonds are valued using the amortized cost method. In other words, the Bank of Japan does not value government bonds at market value, so valuation losses are not reflected in the Bank of Japan's accounting. Therefore, according to these Bank of Japan accounting regulations, the Bank of Japan will not be insolvent.

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However, this only means that the Bank of Japan will not be insolvent according to its own accounting regulations, and it is inevitable that the Bank of Japan will become effectively insolvent if the bonds are valued at market value.

If the Bank of Japan does become effectively insolvent, it is unclear how the foreign exchange market will evaluate it.Because the Bank of Japan is a currency-issuing institution, it is not unable to make payments, unlike an ordinary company that is insolvent.The question is how this will affect the creditworthiness of the yen.If the Bank of Japan's effective insolvency is directly linked to the credit of the currency, the yen will be sold and the yen will depreciate.

There is also a possibility that the Bank of Japan will become insolvent for a different reason. This is due to interest payments on the Bank of Japan's current account.

The Bank of Japan does not purchase government bonds directly from the government, but purchases government bonds that private banks and other institutions have purchased from the government. The purchase price is deposited into the Bank of Japan's current account.

The current account balance of the Bank of Japan is approximately 552 trillion yen as of June 30, 2024. If interest rates are raised, the interest rate on the current account must also be raised at the same time.

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And because the balance is so large, raising the interest rate by just a few percent will result in huge interest payments. The burden of these interest payments could also cause the Bank of Japan to become insolvent.


In this way, raising interest rates will create two problems: effective insolvency due to government bond valuation losses, and insolvency due to increased interest payments. For the former, the excuse can be made that "there is no problem because government bonds are not valued at market value," but this does not work for the latter.

If this insolvency problem is directly linked to the creditworthiness of the yen, the yen will continue to weaken. The Bank of Japan appears to be continuing its low interest rate policy, going against the global trend, fearing that this will happen.

However, even if the low interest rate policy continues, the yen will continue to weaken. In other words, whether interest rates are raised or lowered, it seems that the yen's weakening will not stop either way.

Also, if interest rates are raised, it is not only the Bank of Japan that will suffer valuation losses. About half of the government bonds are held by the Bank of Japan, but the other half are held by private financial institutions, etc.

Therefore, if interest rates rise, private financial institutions that hold government bonds will also suffer huge valuation losses. This could trigger a financial crisis.

And while individuals will also be adversely affected in the form of rising mortgage interest rates, the Japanese government will be the most affected. This is because interest payment expenses on government bonds will increase sharply.

The balance of government bonds (including treasury bills) issued by the Japanese government will reach 1,224.2 trillion yen as of fiscal 2023. This is more than twice Japan's nominal GDP and the largest issuance amount in the world relative to GDP.

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Despite the increase in the amount of government bonds issued, interest payment expenses have remained flat. This is because interest rates have been kept low.

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Interest rates and government bond prices move inversely. As the Bank of Japan purchases large amounts of government bonds at high prices, government bond prices have risen, and interest rates have been kept low accordingly.

First, let's look at the trend in the amount of government bonds issued. This is the trend in the issuance amount of construction bonds, special government bonds, and refunding bonds, which account for the majority of the issuance amount.

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Refinancing bonds are government bonds issued to refinance construction bonds and special government bonds. Construction bonds and special government bonds are operated under the "60-year repayment rule." This is a rule that refinancing is repeated for 60 years to repay.

In other words, even when the government bonds reach maturity, most of the repayment is made with new debt. This is a situation of "paying debt with debt," and this will be repeated for 60 years. For this reason, refunding bonds are issued.

As seen in the previous graph, the scale of issuance of refunding bonds far exceeds the scale of construction bonds and special government bonds. In fiscal 2023, it exceeded 157 trillion yen. Most Japanese people are unaware of the existence of these refunding bonds.

Let's look at the trend in the total amount of government bonds issued, including these refunding bonds.

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Since fiscal 2020, the amount of government bonds issued has exceeded 200 trillion yen for four consecutive fiscal years. The highest amount ever recorded was 256.9 trillion yen in fiscal 2020. This was largely due to fiscal spending to combat COVID-19.

The Bank of Japan was the one that supported this massive issuance of government bonds. Let's look at the amount of government bonds purchased by the Bank of Japan and the percentage of the total amount of government bonds issued.

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In terms of amount, the highest amount was 136 trillion yen in fiscal 2022. And in terms of the percentage of the amount purchased to the total amount issued, the highest was 70.1% in fiscal 2015. The Bank of Japan is the only central bank in the world that purchases such a large amount of government bonds and distorts the market.

Japan was able to sell off a large amount of government bonds, well over 200 trillion yen, in a single fiscal year because of the Bank of Japan's support. If the Bank of Japan stopped purchasing large amounts of government bonds, government bond prices would fall and interest rates would rise sharply.

How will Japan pay for the increased interest payments due to rising interest rates? This will also be paid through debt.

Japan is in a primary balance deficit situation where tax revenues cannot cover even one year's policy expenses. Therefore, if all tax revenues are allocated to policy expenses, the shortfall will be raised through government bonds. In other words, the entire cost of redeeming government bonds will be financed by issuing new government bonds.

Therefore, if interest payment expenses increase due to rising interest rates, it will be necessary to issue more government bonds. Increasing the issuance of government bonds in a situation where the finances have deteriorated to this extent will undermine confidence in the sustainability of Japan's finances, so government bond prices will fall and interest rates will rise.

If interest rates rise, the government will need to issue more bonds to cover the interest payments, which will lead to further interest rate increases. In this way, once interest rates start to rise, there is a possibility that they will not stop. On the other hand, government bond prices will continue to fall.

It will be impossible to maintain the credibility of the currency of a country in such a situation. Along with the fall in government bond prices, the value of the yen may continue to fall.

In this way, if the Bank of Japan reduces the scale of its government bond purchases and allows interest rates to rise, Japan's finances will also be greatly damaged. This situation has arisen because the government bond market has been greatly distorted by the abnormally large purchase of government bonds over more than 10 years.

Let's review again what is expected to happen to the Bank of Japan itself as a result of interest rates rising. There are two things: the Bank of Japan will become effectively insolvent due to loss on valuation of loans, and the Bank of Japan will become insolvent due to increased interest payments on its current account. It seems that the Bank of Japan is afraid of this and is unable to raise interest rates.

While central banks around the world are raising interest rates, the Bank of Japan is the only one that is not, which has created a large interest rate gap, and this is the biggest reason why the yen continues to weaken.

The reason why interest rates are raising and causing such huge losses that the Bank of Japan is insolvent is because the Bank of Japan has purchased a large amount of government bonds, equivalent to the country's GDP. And the large-scale purchase of government bonds is Abenomics itself. Therefore, the current rapid weakening of the yen is a side effect of Abenomics.

The following article explains "Sonotanomics," one of the statistical manipulations that can be said to be a hidden aspect of Abenomics.




If the yen does not weaken further than the current level, it may be possible to continue to get away with it without raising interest rates. However, if the yen weakens significantly, interest rates will have to be raised. Until now, Japan has forcibly corrected the weak yen through currency intervention without raising interest rates. However, currency intervention can no longer be continued once the country's dollar reserves run out.

Japan's fate is entrusted to the foreign exchange market. Everything depends on the exchange rate. 

If interest rates are raised and the yen strengthens, it is still normal. Even if the Bank of Japan falls into insolvency, there is no problem as long as the foreign exchange market ignores it. On the other hand, if the yen continues to weaken even after interest rates are raised, that may be the signal for the end.