What About Japan?

Over the past decade, the Japanese public sector has primarily borrowed at floating rates while investing in longer-duration risky assets, earning an annual return of 6.25 percent of gross domestic product (GDP) above its below-market funding costs. If the public sector had funded itself at market rates without quantitative easing and yield curve control, these excess returns shrink to 2.75 percent of GDP. Additionally hedging currency risk on its foreign investments would have eliminated the excess returns altogether. We quantify the impact of Japan’s low-rate policies on its government and households. The duration mismatch on the government’s balance sheet expands fiscal space when real rates fall, helping the government fulfill promises to older households, but hurting younger and less financially sophisticated households.