Japanification Risks for Indonesia: Evaluating Bank Indonesia’s Bond-
Buying Strategy
Introduction
A recent Bloomberg opinion piece titled “Japanification: Even Indonesia Is
at Risk” warns that Indonesia’s economy could slip into a Japan-like
stagnation due to Bank Indonesia’s (BI) hefty ownership of government
bonds. The term "Japanification" generally refers to an economic condition
marked by ultra-low interest rates, sluggish growth, and a central bank
holding a substantial share of sovereign debt. Japan, in particular,
exemplifies this scenario, having resorted to aggressive quantitative
easing (QE) to revive its economy since the early 2000s. The article
suggests that BI’s bond-buying during the COVID-19 pandemic mirrors the
policies that led to Japan’s prolonged economic malaise. This essay
critically examines whether BI should reconsider its sovereign bond
strategy by weighing the macroeconomic benefits of its recent actions
against potential long-term risks such as fiscal dominance, inflation, and
reduced monetary independence.
Historical Lessons from Japan and QE Economies Japan’s experiment with
QE began in 2001 as a response to deflation and stagnant growth. Over
the following decades, the Bank of Japan (BoJ) amassed an enormous
portfolio of government bonds, holding over 50% of outstanding sovereign
debt by 2020. While this strategy initially provided stability and
suppressed yields, it created structural dependencies. The bond market
became distorted, with the BoJ often the sole buyer, and the exit from QE
proved elusive. Similar patterns, though less extreme, were observed in
other advanced economies such as the U.S., U.K., and the Eurozone. For
example, central banks in these countries increased their share of
sovereign debt holdings by 15 to 30 percentage points from 2008 to 2018.
These experiences underline the dual nature of QE: while effective as a
crisis response tool, it risks undermining market functioning and central
bank autonomy if sustained beyond necessity.
Indonesia’s Pandemic Bond Purchases and Motives Indonesia’s case is
fundamentally different in scale and intent. During the COVID-19
pandemic, the government temporarily suspended the legal 3% fiscal
deficit cap to finance emergency spending. BI implemented a burden-
sharing scheme that saw it purchase approximately IDR 800 trillion
(around $50 billion) in government bonds from 2020 to 2022. This
intervention was critical in stabilizing the bond market amidst capital flight
and investor uncertainty. Notably, BI's actions were taken under
exceptional circumstances and accompanied by a clear exit strategy. By
2022, Indonesia had reinstated its fiscal rules, bringing the deficit below
3% of GDP ahead of schedule. Public debt stabilized at around 40% of GDP
—a relatively low level compared to many emerging markets. Importantly,
BI’s role was not to finance routine deficits but to preserve market
confidence during a systemic shock.
5. Value Creation & Decision-Making
One of the biggest changes in my thinking has been around value
creation. I used to associate it mainly with profit or stock price. Now, I
understand it as generating returns above the cost of capital and doing so
sustainably, both financially and ethically.
My view of risk has evolved too. It’s no longer just something to avoid, but
something to understand, measure, and sometimes even embrace. Tools
like sensitivity and scenario analysis help make risk more transparent and
manageable.
6. Critical Incidents & Reflection
One moment that really pushed me was when we had to value one of
Vinci’s projects from scratch. There were no ready-made numbers. We had
to figure out every assumption ourselves. At first, it felt overwhelming. We
didn’t know where to begin or which benchmarks to use. But as we
worked through it, estimating revenues, projecting growth rate,
calculating terminal value, and essentially building out the model, I
realized this is what real finance looks like. It’s not about getting the
“right” number. It’s about building a thoughtful and defendable story
behind the numbers. That experience helped me get more comfortable
with uncertainty, and it was the first time I truly felt like I was applying
finance, not just studying it.
7. Forward Outlook
One question I’m still exploring is how to accurately calculate the WACC
for a private company. Without a public share price or readily available
beta, it’s not as straightforward, and I want to better understand the
methods and assumptions that can be used in these situations. To keep
building my financial skills, I plan to apply what I’ve learned directly at
work by building a WACC model tailored to our company’s structure. I also
want to stay sharp by studying real-world valuation cases, following
market trends, and possibly pursuing the CFA to deepen my
understanding. This course has helped me reconnect with finance in a
meaningful way and I’m excited to keep learning and applying it beyond
the MBA, especially in my work setting that deal with financial reporting.
