May 9, 2019 / 1:44 AM / in 18 days

BOJ chief rejects idea of Japan as 'Modern Monetary Theory' model

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda rejected an idea gaining traction in some U.S. circles that governments can spend more aggressively without causing hyper-inflation, adding that Tokyo’s economic policies are nowhere close to the concept.

FILE PHOTO: Bank of Japan (BOJ) Governor Haruhiko Kuroda attends the Paris Europlace International Financial Forum in Tokyo, Japan, November 19, 2018. REUTERS/Toru Hanai/File Photo

Kuroda said hyper-inflation could happen not only under extreme circumstances such as after a war, but also due to policy failures, as seen in some Latin American and Asian nations.

“It’s wrong to assume there will be no hyper-inflation even if you boost fiscal spending recklessly, as long as it’s financed by the central bank,” Kuroda told Japan’s parliament on Thursday.

Proponents of Modern Monetary Theory (MMT) say the U.S. government’s monopoly over dollar issuance - the printing press - gives it power to spend as much as needed to meet the full employment and inflation mandates assigned to the Federal Reserve.

Taxes may not be needed to support all spending, as the government can create more money, such as by forcing the central bank to directly underwrite debt, they argue.

Some fans of MMT have cited Japan as a success case, saying Tokyo has been able to boost fiscal spending without causing inflation as the central bank keeps the government’s borrowing cost ultra-low through its massive stimulus program.

Kuroda said Japan was not resorting to MMT, as the government commits to getting the country’s fiscal house in order.

“Japan has deployed economic stimulus policies. But the government believes it’s important to restore fiscal health and make fiscal policy sustainable,” Kuroda said. “It’s wrong to say Japan is resorting to MMT.”

While MMT has yet to gain traction among mainstream Japanese politicians, some analysts say it could appeal to lawmakers who favor big spending to lure votes.

Prime Minister Shinzo Abe has prioritized measures to boost growth over fiscal austerity, slowing progress in reining in Japan’s public debt, which has ballooned to twice the country’s gross domestic product.

Critics blame the BOJ’s ultra-loose monetary policy for allowing lawmakers to delay painful but much needed spending cuts or tax hikes that would reduce Japan’s debt-pile.

Reporting by Leika Kihara; Editing by Richard Borsuk

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