This article introduces an essay by Hideo Tamura published in the Sankei Shimbun on May 16, 2020, discussing the Federal Reserve’s unprecedented dollar issuance, lessons from the Lehman Shock, the Bank of Japan’s monetary policy, the risk of a sharp yen appreciation, and the need for coordinated government bond issuance and BOJ purchases to prevent a coronavirus depression and acute deflation.

2020-05-18
The FRB is issuing dollar funds at a furious pace.
The scale of the increase in dollars during the two months from the outbreak of the crisis to early May is 2.5 times that after the financial crisis of September 2008, the “Lehman Shock,” and is truly unprecedented.
The following is from an essay by Mr. Hideo Tamura, published in the Sankei Shimbun on May 16 under the title “Bank of Japan, Print Money No Less Than the FRB.”
Among those making a living in Japan’s economic world, most of whom speak only the economic and fiscal theories handed down by the Ministry of Finance, he is one of the few genuine economic journalists.
This essay is, in terms of economic theory and fiscal theory, the most important essay at this moment.
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The Federal Reserve Board, the FRB, is issuing dollar funds at a furious pace.
It is to overcome the new coronavirus depression originating in China.
The scale of the increase in dollars during the two months from the outbreak of the crisis to early May is 2.5 times that after the financial crisis of September 2008, the “Lehman Shock,” and is truly unprecedented.
Here are the questions.

1. Even if the United States prints that much money, will it not fall into malignant inflation?
2. Is it a plus for the Japanese economy?
   Let me give the answers first.
3. There is no fear of high inflation.
4. If the Bank of Japan loses to the FRB in money printing, Japan’s coronavirus recession will accelerate.
   The total amount of money in a country is called “money stock,” and is expressed as the total amount of cash circulating in society and deposits that have a character similar to cash.
   On the other hand, the monetary scale of the economy in which we live is expressed by gross domestic product, GDP, which is obtained by multiplying total production volume by prices.
   Money stock is linked to GDP.
   If production volume falls while only money increases, the calculation is that prices rise, and in this case malignant inflation occurs.
   Germany after the First World War, and some parts of Latin America and Africa in recent years where currencies were issued recklessly, are typical examples.
   Absurdly, in our country as well, the argument that currency issuance by the Bank of Japan and purchases of government bonds by the Bank of Japan should be rejected because malignant inflation might occur is widely accepted even among scholars serving the Ministry of Finance and in the media world.
   The point is that when demand is insufficient compared with production capacity, even if the central bank prints money, most of this money does not become money stock.
   The central bank prints money and mainly buys government bonds from financial institutions, and the money is deposited into the current-account deposits that financial institutions hold at the central bank.
   If financial institutions lend this money to companies and households, it returns as deposits, and therefore the total amount of money, the money stock, increases.
   However, when the future cannot be foreseen because of deflation or a financial crisis, banks try to reduce lending.
   Companies and households also try to avoid borrowing as much as they can manage.
   In Japan, the United States, and other countries hit by the coronavirus shock, production volume, meaning real GDP, shrinks by several tens of percent on an annualized basis.
   Because bank lending decreases, the total amount of money decreases.
   The result is deflation.
   After the Lehman Shock, the FRB printed four times as much dollar funds as before, but it could barely avoid deflation, and the inflation rate remained low throughout.
   Now, in the coronavirus shock, even if the FRB buys government bonds without limit for the time being and prints money, far from raising the inflation rate, it will probably be doing all it can merely to ease deflationary pressure.
   FRB Chairman Powell has clearly declared support for the Trump administration’s issuance of additional government bonds.
   The Trump administration is trying to increase demand backed by money, that is, effective demand, through fiscal spending on the scale of three to four trillion dollars.
   The FRB’s additional money printing can prevent a deflationary depression only by being linked with the issuance of additional government bonds.
   What about Japan?
   In my previous column, I argued that while the United States, which relies on borrowing from abroad, is constantly accompanied by the risk of dollar anxiety, and China, constrained by its foreign-exchange reserves, has limits to fiscal and monetary expansion, Japan, where the resource called money is more abundant than anywhere else in the world, can easily overcome the coronavirus depression.
   However, there is a condition.
   The Bank of Japan must not lose to the FRB in printing money.
   If it loses, the yen will appreciate sharply, and even if the coronavirus disaster passes, the Japanese economy could sink into the abyss of acute deflation.
   In fact, that is what happened in the Lehman Shock of September 2008.
   The graph shows the Bank of Japan’s issuance of funds per one dollar of FRB dollar-fund issuance after the Lehman crisis, the Soros chart, and the changes in each side’s assets.
   Central banks print money in order to buy assets such as government bonds.
   After the Lehman crisis, the FRB printed dollars at tremendous speed, but Masaaki Shirakawa, then governor of the Bank of Japan, did not print yen.
   The yen rate on the Soros chart continued to fall sharply.
   In the market, a sharp-yen-appreciation phase began.
   In December 2012, Abenomics began, and the Bank of Japan embarked on unprecedented monetary easing.
   The Soros chart reversed, and the super-strong yen shifted into a weak-yen phase.
   After that, the exchange rate came to stabilize at around 110 yen to the dollar.
   At the beginning of the coronavirus shock, the Bank of Japan was slow to act, but on April 27 it declared “unlimited purchases of government bonds.”
   It said this was to maintain government-bond yields at zero percent.
   Since financial institutions awash with money have strong demand for government bonds, Bank of Japan purchases can at least bring government-bond yields to zero.
   The Soros chart is drawing the same slope as after the Lehman crisis and is pointing to a stronger yen.
   The government should issue government bonds on the scale of 100 trillion yen, and the Bank of Japan should cooperate by purchasing 100 trillion yen.
   Editorial writer.