The Bank Of Japan owns around 45% of all Japanese debt issued as government bonds. The Bank of Japan gets its funds solely from the government – it’s not a commercial bank that gets its money from clients to invest in bonds. Therefore, the government basically owns it own debt. Isn’t that just the government taking money from one of its pockets to put it in the other pocket? How could you default on a debt to yourself? Why go through the charade of buying government bonds in the first place to only have to pay interest on which, of course, you can collect the interest? I know they are independent entities but the money still has the same root even if the decision making bodies have some independence.
In: Economics
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Essentially everything you know about how you use money goes out of the window when you get to the macroscopic level, and especially on the governmental level
As ELI5 as I can make it, they (and any government) is able to do this to control the amount of currency in circulation and encourage either saving for purchases or encouraging spending on debt.
The government prints it’s own money and charges future governments interest on the loan. So-
Q1. Taking money from the **future** governments pocket and putting it into their own.
Q2. You can’t really default at all. They can always print off more tomorrow.
Q3. The government doesn’t really collect the interest. The **future** government collects the interest on the loan the government took out, when the Bond matures.
That’s a gross simplification, but as you can see, ultimately, it’s all BS. It’s todays government printing money because it wants to spend it. Like when they want a war they print it off. When the people need healthcare or education, “But how you going to pay for it?”
> Isn’t that just the government taking money from one of its pockets to put it in the other pocket?
It’s exactly that and it’s an accounting trick. The government put rules on how it could transfer money so when it wants to cheat it has to work around the rules it created.
Most of national debts in the developed world are owned by the institutions and population of those countries. 70% of the U.S. debt is owned by U.S. banks, insurers, pension and investment funds and US citizens. It’s pretty normal for a central bank to own debt (of many things, not just the country), it is an investment instrument like any other and it’s also the lowest risk one, so good for balancing a portfolio.
The key to understanding the answer is to realize that in Japan and in many other countries (including the US, Canada, UK, etc.) the country’s Central Bank is independent from the country’s Government.
For example, the Prime Minister of Japan can’t order the central bank (Bank of Japan — BOJ) to raise or lower interest rates. And conversely the BOJ can’t tell the government to balance their budget.
The two entities are independent, by law. They don’t share bank accounts, etc. The BOJ is not funded by the government and they have their own money.
This isn’t so different from other “segregation of powers” schemes. E.g., in most countries there’s separate Legislative, Judicial and Executive branches. They are by design independent from each other and often act in opposition to each other (to provide “check and balances”).
Back to bonds. The Government of Japan can decide to raise money to fund legislative priorities by issuing bonds. They do so through the Ministry of Finance (MOF). The MOF decides how much bonds to issue and other details like the maturity, interest rate, etc.
The bonds are made available in the open market and then anyone can buy those bonds… including the Bank of Japan, using it’s own money.
The BOJ has a different mandate than Government of Japan. Maybe the government wants to raise money to build infrastructure, or to strengthen the military, or to build new power facilities.
The BOJ doesn’t really care about all that. They want to ensure that inflation is stable, that the currency / foreign exchange rate is under control, that the amount of money supply in the economy isn’t too tight or too loose, etc. So the BOJ will buy and sell bonds from the open market to influence monetary policy.
By the way, this is exactly the same in the US, Canada, UK, etc.
The US Federal Reserve owns a large proportion of US Government debt.
And similarly the Bank of Canada owns a significant proportion of Canadian government debt (over 40% during the pandemic).
There are two reasons, first is that businesses (especially banks) are bound by a lot of laws. These laws are there to e.g. protect the customers interest and ensure fair competition. Because of these laws, the government can’t directly take money from the bank whenever it needs it. It’s the same reason why they can’t just take money from the people, even though the government are democratically elected to represent the people.
Second reason is that when debts are owed by the government rather than a person, it’s not that bad. The borrowed money are spend on government projects and paid to contractors, so it improves infrastructure and puts money into the people’s pockets. All great stuff that stimulate economic activities. The government has a lot of methods to pay back the money owed to bond owners without losing anything, such as printing more money to the extent that the total money paid back in the future is worth less than what they are borrowing now.
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