Fear Not Rising Borrowing Costs In Japan

Japanese Prime Minister Shinzo Abe delivers a speech during a national meeting to demand the return of what Japan calls the Northern Territories, seized by Russia in the closing days of WWII and called the Kurils in Tokyo on February 7, 2013.

Photo by TORU YAMANAKA/AFP/Getty Images

William Pesek has a completely accurate Bloomberg View item noting that if Shinzo Abe succeeds in using expansionary monetary policy to raise Japan’s growth rate, higher interest rates on Japanese government bonds will be one consequence. Unfortunately, this is described as a “dark side” and full of references to “bond vigilantes holding sway over borrowing costs” and the prospect that higher rates will “shake Japan Inc. to its core.”

I would say that undue concern that expansionary policy will raise borrowing costs is the flipside of undue concern about budget deficits in a depressed economy. The starting point for understanding is to realize the difference between the dynamics facing a country that borrows in its own currency and a country that floats debt in a foreign currency. If you’re Peru and you’re trying to borrow dollars, then that’s a lot like being a household or a firm. Low borrowing costs are a sign of creditworthiness, and lower borrowing costs are always better. A sovereign currency issuer is different. You can be as fiscally irresponsible as you like (see, e.g., Japan) and your borrowing costs will stay low as long as the growth outlook looks bad. But that’s a fancy way of saying that low borrowing costs are bad, a sign that you’ve mired your economy in disaster.

Get your economy out of the ditch, and borrowing costs will rise. That means you have to stop wasting money on low-value spending initiatives and make sure your taxes are high enough to cover the bills for the high-value spending. But that’s not a “dark side” of economic recovery, that’s just what economic recovery is. It’s a situation in which private actors want to invest their money in private business undertakings, such that low-value public sector spending is wasteful. If there’s severely depressed demand for private investment then, yes, you can cheaply finance bridges to nowhere and doomsday missile subways without crowding anything out. But the ability to finance low-value projects cheaply is itself low-value.