To appropriate additional sources of fiscal revenue, the Bank of Japan (BOJ) started direct underwriting of new deficit-financing government bonds (GBs) (BOJ underwriting) on November 25, 1932. This paper examines the BOJ's underwriting policymaking process through the use of newly available archived documents from the BOJ and the Ministry of Finance (MOF).
Evidence from these documents contradicts conventional arguments that the BOJ was forced to underwrite GBs due to Finance Minister Korekiyo Takahashi's firm request and that it regarded the policy measure as temporary. Instead, the BOJ was confident it could exert monetary control through the market operation of selling underwritten GBs (selling operations). In addition, the BOJ willingly accepted the underwriting, expecting it to reinforce its influence over financial institutions.
BOJ policymakers partly forecasted the course of events. First, the BOJ started underwriting during the Takahashi economic policy period (1931-36). Once it started, it was difficult for the BOJ to stop underwriting bonds. The BOJ was forced to continue underwriting deficit-financing bonds because of expanding financial demand. Second, the MOF used very complex and irregular budgeting methods beginning with the budget process of fiscal 1936. This created a large deferred fiscal burden that concealed the realities of fiscal deficits.
Keywords: Direct underwriting of deficit-financing bonds by the BOJ (BOJ underwriting); Joint Research Committee; Currency system; Market operation by selling government bonds; Continuing expenditure; Deferred fiscal burden
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.