The world is awash with debt. Especially, "Japan's public sector is essentially bankrupt" (Financial Times, Dec. 15, 2000). The government has a public sector debt well above 160 per cent of gross domestic product. Japan's outstanding debt now equals more than 20 per cent of global GDP. But Japanese Government Bonds, 10-year bonds are yielding a mere 1. 945 per cent (Jul. 10, 2006), the lowest rate among Group of Seven industrial countries. Government Bonds market conditions are bubbly. Because, the Bank of Japan buys Government Bonds from the market each month to support bond prices, through money-market operations. And banks have cut corporate loans, they have placed their funds in government bonds. The important point here is that, in view of the uncertain economic outlook, Government Bonds are regarded by banks, investors, as excellent investment instruments. They make a big profit from the Government Bonds market. If Government Bonds bubble burst, the higher the burden rises, the bigger the economic pain any future rise in yields will cause. Then a debt crisis will trigger a economic crisis.

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In fiscal 1965, the Japanese Government could not continue to balance the budget and started to issue government bonds. Gross debt of the national government grew rapidly following the first oil crisis. Consequently, Japanese banks and the Bank of Japan have greatly increased their holdings of government bonds. The Bank of Japan, in particular, has had to increase the amount of outright purchases of long-term government bonds since the introduction of the quantitative easing policy in March 2001. Recently, many market participants and economists argue that a largely treasury-only portfolio of central banks would be appropriate as the markets for government bonds are large and liquid. This paper first examines the course of this large increase in the outright purchase of government bonds by the Bank of Japan, and then looks at a popular belief that the issuance of central bank notes should be supported by long-term government bonds. In addition, the paper shows that this popular belief is premised on the specific historical condition of the fiscal deficit. The paper also looks at the relationship between orthodox monetary policies and the accumulation of government bonds. The paper does not follow the old argument that central banks should hold only gold, foreign exchange and real bills, rather, it contends that the main issue is the way contemporary capitalism, financial systems and monetary policies are analyzed. Japan's future fiscal condition will be severely affected by its ageing society and the apparently ever increasing strength of the Yen. Under such circumstances, the Bank of Japan is likely to be under pressure to maintain the price of long-term government bonds and thereby keep long term interest rates low. Such a policy is likely to affect central bank independence, a very dangerous prospect. Finally, this paper emphasizes that central bank notes are not supplied exogenously. Private sector banks supply money (deposits) endogenously and people obtain central bank notes by withdrawing deposits. The demand for central bank notes is a part of the total demand for monetary aggregates supplied by private sector banks. The relationship, therefore, between the accumulation of government bonds and the structure of balance sheets of central banks concerns the overall contemporary financial systems.

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The ratio of the Japanese government long-term debt to GDP in 2006 is 117%. It is the worst in OECD countries. Japan is in the extraordinary situation where the Japanese government has to spend over 40% of its tax revenue to national debt service. A moment of great crisis of national bankruptcy is coming. However the Japanese government continues to issue the ten-year Japanese Government bonds with a very low coupon rate, while every year it must get huge money by government bond from a financial market already suffering its oversupply. At first this paper focuses on the historical accumulation of the Japanese government bonds. One of the major factors that allowed the Japanese government to expand public finance depending on government bond is article 4 of the Public Finance Law. Issuing construction bonds to finance public work has no limit except approval by Parliament according to this article. Secondly this paper discusses the credibility of the state or the government as a borrower. The economic power of the state to levy tax is originally based on the political power of the state as a political subject. Therefore the economic power of the state dually influences a relationship between creditor and debtor as market mechanism. Although it usually strengthens the credibility of the state as a borrower, it might ruin its creditors facing a crucial fiscal crisis.

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This paper analyzes that the role of U.S. in the international capital movements is not passive as the standard theory argues but active in the first half of 2000s. Using publications by IMF, BIS, U.S. Department of Commerce and rating agency, etc., the active role of U.S. in the international capital movements is observed. While U.S. financial institutions supply a large amount of short-term funds through repurchase agreement to hedge funds, highly leveraged institution, based in Caribbean financial centers, they also invest their funds actively for trading strategies similar to hedge funds or buying them. Interestingly, U.S. as the provider of the dominant international currency is 'active' in enhancing the liquidity in the international financial system. U.S. is the 'starting point' in the international capital movements, the standard theory explains the role of U.S. as 'a world banker' which is playing the role of a passive international financial intermediary. On contrary, U.S. has become from 'a passive world banker' to 'an active financial conglomerates in the world', as I summarized in this paper.

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In Japan, the ratio of non-regular workers to the total employment rose gradually in the 1970s and 1980s, and has been growing conspicuously since the 1990s. The wage differential between regular and non-regular workers has been increasing steadily since the 1970s as shown in Fig. 1. These phenomena are assumed to be due to the compound effects of recession, technical change, economic globalization, and de-industrialization. The present paper focuses on the effects of de-industrialization. According to the "Employment Status Survey" by Ministry of Public Management, Home Affairs, Posts and Telecommunications, employment in manufacturing accounted for 35.9% of the total employment in 1974, but it continued to decline to 28.5% until 2002. Defining de-industrialization as a decline in the share of manufacturing in the overall national employment, Japanese de-industrialization began in the mid 1970s. Robert Rowthorn claims that the relative decline in manufacturing employment has been largely due to the rapid productivity growth in this sector, showing that labor productivity in manufacturing has consistently exceeded that of services in leading industrial nations. In order to analyze the above phenomena, the relatively high labor productivity in the manufacturing sector is applied exogenously to my model to scrutinize the effect of de-industrialization on the dual labor markets economy. This model has the following features. A closed economy is divided into two sectors, i.e. a manufacturing sector and a service sector, both of which employ such factors as primary labor, secondary labor, and constant capital stock. I assume a dual labor markets economy as illustrated descriptively by Doeringer and Piore. While the wage of the primary labor in each sector is determined by the efficiency-wage setting in each firm, the wage of the secondary labor is determined competitively, resulting in equal wages in each sector. Assuming homogeneous labor suppliers, those who cannot get a primary job are forced to decide whether to continue to seek a steady job while remaining unemployed or to work as a secondary worker. With this model I outline the process of de-industrialization in which the wage differential between primary and secondary labor is growing larger and the proportion of secondary labor to primary labor is increasing. The exogenous augmentation in labor productivity in the manufacturing sector reduces the employment in manufacturing. Of those who have lost their job in the manufacturing sector, some are employed as primary labor in the service sector, some remain jobless while seeking a primary job, and others work as secondary workers in each sector. It follows that the possibility of getting a primary job has been declining and labor suppliers choosing to work as secondary workers has been increasing. As a result, the secondary labor market supply is in excess and wages goes down. As the wage of primary labor is somewhat more rigid than that of secondary labor in each sector, the wage differential between primary and secondary labor becomes greater. The widening wage differential implies that the secondary labor cost is comparatively low. It makes manufacturing firms prefer to employ secondary labor and the ratio of secondary labor to primary labor goes up in manufacturing sector. Under the first condition in this paper, that service firms prefer to employ secondary labor, the ratio of secondary labor to primary labor also rises in the service sector.

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The question of the long-run prospects of profitability and its association with the stage of capital accumulation have occupied central importance in the history of economic thought. This paper focuses on Marx and Keynes and argues that Marx's analysis, despite its incomplete nature, is logically consistent in both explaining the falling tendency of the rate of profit as well as the precise mechanism that leads the economy to its crisis stage. Keynes's analysis, although sketchy, has more in common with Marx and Smith than with Ricardo and neoclassical economics. Furthermore, Keynes's views on effective demand and the way in which it affects profitability and capital accumulation might be gainfully used for the formulation of a more advanced theory to explain and at the same time direct, within strictly defined limits, the dynamics of capitalist economies.

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Japan has been trapped in a prolonged recession since the collapse of the bubble economy. From soon after the collapse, financial crisis spread throughout the economy. Many banks, big and small, were driven to bankruptcy. Neoclassical economists have pushed for market-oriented economic reforms in pursuit of efficiency. Economic liberalization and reduced government restrictions have actually been global trends since the 1980s. Amidst the numerous of market-oriented economic reforms promoted by the Koizumi cabinet to cope with the severe recession, the most ambitious has been the plan to privatize the post-office saving service. However, opponents of the plan insist that the post-office saving service and guidance policy finance have counterbalanced the failings of the financial intermediaries during the post-bubble period. In other words, they argue that the public finance system has been useful to prevent further financial crisis. Minsky (1975), on the other hand, has reevaluated Keynes's theory and proposed the financial instability hypothesis. According to this hypothesis, the complicated financial structure underlying the capitalist economy generates business fluctuations. Minsky's ideas have been studied extensively by various authors. Taylor and O'Connell (1985) demonstrated that an economy might fall into financial crisis when declines in expected profit rates aggravate the financial condition of firms and increase the household preference for liquidity. Post-office savings, however, are a risk-less asset. If the funds return to financial markets through guidance policy finance, the economy might not fall into a financial crisis. The main purpose of this paper is to examine the effects of guidance policy finance in a macro-dynamic model of financial instability. Our results demonstrate that guidance policy finance stabilizes an economy which has been destabilized by the financial factor alone. In short, guidance policy finance can be a useful instrument to prevent financial instability. We also demonstrate a financial cycle by applying the Hopf bifurcation theorem in our model of an economy destabilized by the financial factor alone.

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