Kuroda Foe Says Japan Will Prove Modern Monetary Theory a Mistake

(Bloomberg) -- A former adviser to George Soros known for his criticism of Bank of Japan Governor Haruhiko Kuroda says Japan’s reflationary policy amounts to Modern Monetary Theory and will prove to be a big mistake.

The comments from Takeshi Fujimaki come just days after Prime Minister Shinzo Abe, Finance Minister Taro Aso and Kuroda all denied that Japan is experimenting with the theory. They also rejected the MMT view that countries with their own central banks and borrowing in their own currencies -- like the U.S. and Japan -- can’t go broke, and don’t need to worry about overspending so long as it’s not generating high inflation.

MMT is “ridiculous” and “voodoo economics,” Fujimaki, a lawmaker with the small opposition Japan Innovation Party, said in an interview Tuesday, adding that it was “absolutely no different” from what Japan is doing. Fujimaki said that Japan’s current policy trajectory would eventually lead to a financial collapse, proving the theory wrong.

The Bank of Japan has purchased enough Japanese government bonds to finance the bulk of the government budget deficit since Abe took office in December 2012, which has helped support growth and incomes in the world’s third-largest economy. But the negative side effects are starting to pile up as investors and lenders increasingly struggle to cope with ultra-low interest rates.

Critics have long warned that bond prices would collapse and the yen plummet as markets lost confidence in Japan if the BOJ bought vast amounts of government debt. But Abe told parliament last week that simply hadn’t happened. He added that bond prices had in fact gone up, while investors continue to reach for the yen in times of crisis, an indication of faith in Japan’s fiscal credibility.

Abe said he nevertheless did not subscribe to the view that governments can increase debt without consequences and added that a sales tax increase planned for October was meant to help control debt.

MMT is getting validation from some Wall Street economists even as it’s slammed by others for offering a “free lunch.” It has been advocated by Democratic U.S. Representative Alexandria Ocasio-Cortez, whose ideas are spread to her millions of followers on social media. Big-name economists such as Harvard’s Larry Summers and Nobel laureate Paul Krugman have denounced it.

To contact the reporters on this story: Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net;Emi Nobuhiro in Tokyo at enobuhiro@bloomberg.net

To contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net, Jon Herskovitz, Brett Miller

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