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(Reuters) - Japanese banks and pensioners will be first in line to feel the pain if Japan successfully reignites inflation and inflates away its debts.
Which are two very good reasons truly effective central bank action may not happen, and if it does will carry heavy unintended consequences.
Fresh from a landslide victory on Sunday, Shinzo Abe, Japan's next prime minister, lost no time in hammering home the demands he's made on the Bank of Japan, saying the electorate had ratified his calls for more stimulus.
"It was very rare for monetary policy to be the focus of attention in an election, but there was strong public support to our view," Abe said at a Monday press conference, his first since his Liberal Democratic Party was swept back to power.
"I hope the Bank of Japan takes this into account (at its policy meeting this week)."
If Abe is able to bend the BOJ to his purpose then the yen will weaken and inflation will at last rise.
Abe has called for an "accord" with the BOJ to double its current non-binding goal of 1 percent inflation with a hard 2 percent target backed by what he calls "unlimited" monetary, or quantitative, easing. He's also, at various times, called for the BOJ to buy government bonds he'll use for stimulus investment, and to buy foreign bonds in order to weaken the yen, as well as speaking of revisions to the law enshrining the BOJ's independence from government on monetary policy.
If Abe is able to bend the BOJ to his purpose the yen will weaken and inflation will at last rise, moving money around the economy and easing the burden on Japan of repaying its massive government debt, last seen heading towards 250 percent of GDP.
Inflate the debt away slowly and it is a thing of beauty; do it rapidly and we call it a debt crisis.
Make no mistake, even a debt crisis, one that evaporates debt, might actually be a good thing for Japan. That's not to underestimate that if inflation does come back to Japan there will be huge costs, some of which could easily be destabilizing.
The most obvious point to make is that if you inflate your way out of a sovereign debt pickle you do so by, in effect, robbing your creditors. There are certain creditors whom it is, if not OK, than at least not hugely foolish to do down by reneging on debt by causing it to vanish via inflation. Among these might be counted foreign central banks, or even one's own central bank, which after all is a creature of the state and can be recapitalized in newly devalued yen, or dollars or euros.
It is a lot less easy if your path to inflation involves stepping on the bodies of your banking system and retirees, both powerful constituencies which would be greatly harmed by a sharp rise in inflation.
The fact that most of Japan's debt is internally financed is often cited as a strength, but that very strength becomes a bit of a liability when you start to, er, rob those who own your debt.
"A more assertive and sustained QE, alongside a weaker currency, and a more reflationary economic policy might help to lift Japan's nominal GDP," George Magnus, veteran economist at UBS wrote in a note to clients.
"If this happened, JGB yields might (finally) rise, and this might well affect the debt-financing capacity of the banking system, which hold JGBs equivalent to nine times their tier 1 capital, according to the Bank for International Settlements, and of pension investment funds, which own almost 20 percent of JGBs outstanding, and are, in any event, having to pay increasing amounts of pension benefits."
You see when inflation rises the value of the government bonds falls, and if you hold nine times your capital in those bonds and they fall rapidly, well, the Japanese banking system would soon find itself unable to access finance and in need of urgent government rescue.
Similarly if pensioners see their benefits imperiled by a fall in the underlying value of the retirement funds, the politics of reflation, especially in an aging society like Japan, may seem a bit less attractive.
Again, this is not necessarily an argument against reflation, but an accounting of the difficulties and costs it will impose.
At the same time, with Japan's current account - essentially the amount available to meet external obligations - slumping, foreign creditors may soon lose faith. Japan may well want to get on with the job of allocating the pain among a rather more biddable and cooperative domestic group of creditors.
Either way it will be a tough job; may as well get on with it.
(James Saft is a Reuters columnist. The opinions expressed are his own)
At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on