Why Has Japan's Massive Government Debt Not Wreaked Havoc (Yet)?

Charles Y. Horioka, Takaaki Nomoto, Akiko Terada-Hagiwara

NBER Working Paper No. 19596
Issued in October 2013, Revised in January 2014
NBER Program(s):International Finance and Macroeconomics, Public Economics

In this paper, we present data on trends over time in government debt financing in Japan since 2010 with emphasis on the importance of foreign holders and speculate about the determinants of those trends. We find that Japanese government securities were held primarily by domestic holders until recently because robust domestic saving (combined with strong home bias) made it possible for domestic investors to absorb most of the government debt but that foreign holdings of Japanese government securities have increased sharply in recent years, especially in the case of short-term government securities. We show that trends in foreign holdings of Japanese government securities can be explained by conventional economic factors such returns and risks and that the recent surge in foreign holdings of short-term Japanese government securities is attributable to foreign investors in search of a safe haven for their funds in the face of the Global Financial Crisis of 2008-09 precipitated by the Lehman crisis. Our analysis suggests that the surge in foreign holdings of Japanese government securities will subside (in fact, it already has), and this, combined with the projected decline in domestic saving (especially household saving) caused by population aging, will create increasing pressures for fiscal adjustment to reduce her massive government debt. Thus, Japan's massive government debt has not resulted in high economic costs in the past because of robust domestic saving and a temporary inflow of foreign capital caused by the Global Financial Crisis, but it may have substantial costs in the future as both of these factors become less applicable unless the government debt can be brought under control.

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Document Object Identifier (DOI): 10.3386/w19596

Published: Charles Yuji Horioka, Takaaki Nomoto & Akiko Terada-Hagiwara (2015) Why Has Japan’s Massive Government Debt Not Wreaked Havoc (Yet)?, The Japanese Political Economy, 40:2, 3-23, DOI: 10.2753/JES2329-194X400201.2014.11082950

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