Traditionally, there are three ways for countries to finance recovery from a natural disaster: cut other spending, raise revenues or print money. Japan, because it has to, is taking the third way.
With its key overnight interest rate at almost zero, the Bank of Japan could not simply go lower, as New Zealand did after the February Christchurch earthquake. Rather, the BoJ is providing sufficient liquidity to keep it there: some Y21,800bn ($265bn) by Wednesday, equivalent to 11 per cent of its balance sheet. That should keep companies and banks trading until loan losses are quantified. In addition, the BoJ is doubling its asset-purchase programme to Y10,000bn to keep longer-term rates in check. Neither act presents big practical difficulties. The first is as straightforward as entering a few digits on banks’ current account balances at the BoJ. In the second, the BoJ has literally crossed out its old spending limits and added new ones – Y1,500bn on government bonds, for example, is now Y2,000bn.
If only the government could move with such decisiveness. A supplementary central budget of perhaps Y10,000bn – much larger than the Y3,200bn spent after the 1995 earthquake – could certainly galvanise the recovery. But the rebuilding of Kobe was begun at a time when tax receipts exceeded bond issuance by Y30,000bn. Bonds (Y44,300bn) should exceed tax (Y40,900bn) for the third successive year in Japan’s new fiscal year, beginning next month. Naoto Kan’s weak coalition government cannot easily tweak existing plans, either. Spending on public infrastructure was supposed to fall by 14 per cent to just under Y5,000bn in the coming year to offset higher bills for social security (Y28,700bn) and debt servicing (Y21,500bn).