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
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).
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