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Japan Says It’s Not a Testing Ground for Modern Monetary Theory

Japan Says It’s Not a Testing Ground for Modern Monetary Theory

(Bloomberg) -- Three key architects of Abenomics dismissed the view that Japan is applying modern monetary theory or that it serves as a testing ground for its application.

Prime Minister Shinzo Abe, Finance Minister Taro Aso and Bank of Japan Governor Haruhiko Kuroda all rejected the central tenet of MMT that a government doesn’t need to worry about running up debts when managing the economy provided it only borrows in its own currency. Their rejection was the latest attempt by senior policy makers in Tokyo to distance Japan from the theory.

With an increasing number of economists flagging the risk of recession in Japan, the use of fiscal policy to support growth has come under renewed scrutiny, helping fuel the debate on MMT. That’s because of the lack of additional measures available for the BOJ to help, should Japan’s economy falter.

Speaking in parliament, Abe acknowledged that some adherents of MMT had latched on to Japan as an example to back up their views.

Back in 2012, critics of Abenomics had warned that bond prices would collapse and the yen would plummet as markets lost confidence in Japan if the BOJ bought vast amounts of government debt, but that simply hadn’t happened, Abe said. Bond prices had in fact gone up, while in times of crisis investors continue to reach for the yen, an indication of continued faith in Japan’s credibility, Abe said.

Still, none of this validated the view that a government can simply rack up debt with no regard for the consequences, he added, a view reiterated by Kuroda and Aso in separate comments.

Kuroda Roundly Rejects Modern Monetary Theory as Extreme

Japan is pushing up the sales tax to increase revenue precisely because it is worried about controlling its debts, limiting wasteful expenditure and maintaining investor confidence, Abe said.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Paul Jackson in Tokyo at pjackson53@bloomberg.net

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig

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