The Bank of Japan is ostensibly prohibited from underwriting Japanese Government Bonds (JGBs), which is why many investors might be surprised to learn that the BOJ actually can and has been doing so.
Article 5 of the Public Finance Act prohibits directly underwriting newly-issued JGBs other than “in exceptional circumstances,” and also requires any such exception to be authorised by the Diet, the Japanese legislature.
But a new Credit Suisse research note reports that the central bank does in fact underwrite JGBs upon maturity. This is a process known as “BoJ rollover,” because when government bonds owned by the Bank of Japan are retired, the proceeds can be used to underwrite government bills for the purpose of rolling over the government’s debt.
Credit Suisse also calls the process a “stealth weapon,” because the operation has already been pre-approved by the Diet — a sort of permanent exception.
The underwriting is approved by the Diet “as part of annual budget formulation proceedings,” the report states. The legislation says that underwriting is permitted “to the extent necessary to refinance bonds held by the BoJ” — putting the “ceiling” at around 40 trillion yen this fiscal year, Credit Suisse estimates.
Which means that the Bank of Japan is effectively able to underwrite 40 million yen in government debt each year, without being constrained — as it seems — by the Public Finance Act or requiring a new vote from Diet.
And if the Bank of Japan were to increase its rollover in order to offset a fiscal stimulus package from the government, the report says, it would “reinforce the impression that the government and central bank are effectively functioning as a single entity.”
This is important to keep in mind amidst the speculation that the central bank could use helicopter money to combat Japan’s deflation.
Although this process would not constitute helicopter money, it would represent cooperative policies between the central bank and the government. Haruhiko Kuroda, the Governor of the Bank of Japan, recently told the Wall Street Journal that although Japan would not fund fiscal expansion with monetary policy, this kind of cooperative relationship could be possible.