Friday, November 22, 2013

High Japanese debt will become a problem

Japan has been able to sustain unusually high debt levels for a long time, even when other countries were facing debt crises despite having lower debt to GDP ratios, and more sustained GDP growth. What makes Japan so different, and what does this imply for the sustainability of Japan's debt?

Charles Yuji Horioka, Takaaki Nomoto and Akiko Terada-Hagiwara analyze the recent evolution of Japanese debt and have a grim outlook. Up to a few years ago, the debt was largely financed by Japanese households saving towards retirement. But as Japan is continuing through its demographic transition toward an older population, this source of funding is going to quickly dry up, if not reverse itself as an older population requires more transfer payments. During the few last years, an increasing share of debt was bought from abroad by investors looking for safe alternatives during times of financial turmoil. This temporary funding allows to mask the underlying drying up of internal funding. This foreign debt also carries a shorter maturity, so we may expect soon some problems in Japan, especially if other investment opportunities start looking better. Unless the Japanese government gets its fiscal house quickly in order, we may see again a country struggling with its debt.

2 comments:

a jjwinterpretation said...

This paper is good at presenting the data. It is terrible on forecasting.

There is a huge logic gap between reducing JGB holdings by JP households and a financial "Wreaked Havoc". In case of the first signs of Greek-like crisis, why would not Bank of Japan set up to buy all extra JGB in the market? Of course, they will. The default of JGB is just unthinkable for JOB, government, and Japanese people! There are some downsides of owning 50% or more JGB by BOJ. Yen will be weaker. Inflation will be not a big concern because those money was spent by governments long time ago. As long as there will be no new massive government spending, there is no new inflational pressure. The downsides are nothing comparing to the sizable marked downs of JGBs.

It does not mean Japan is free from problems in the future. Japanese lost decade more and more looks like "lost century". But reducing JGB holdings by JP households is just a minor side show.

Anonymous said...

I agree with the commenter above. These guys are way off base. Japan is in a liquidity trap still, so any movement to try to reduce its deficit via tax increases or spending cuts will likely worsen the economy by enough to make it hard to close any fiscal gap. What Japan needs to do is more Abenomics -- have the central bank restore 2-3 percent inflation, and actually be more aggressive than it has been. Faster nominal GDP growth is by far the best way to cut the debt/deficit.