If the government depends on the central bank’s underwriting and ignores the market’s risk assessment function, the government debt could eventually expand to a level beyond the taxpayers’ funding capacity. After the earthquake, there has been increasing public interest in the historical episode of the Bank’s underwriting of government securities in the 1930s, when Mr. Takahashi was the Minister of Finance.
This started as “temporal” but it soon became impossible to put a brake on the increase in the amount of underwriting and the associated expansion of currency issuance, which ultimately resulted in serious inflation. We need to reflect on this history. There are some counterarguments that, if underwriting creates such a problem, the Bank could purchase government securities from the market instead.