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(DP 2013-10) Why has Japan’s Massive Government Debt Not Wreaked Havoc (Yet)?

UPSE Discussion Papers

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Title (DP 2013-10) Why has Japan’s Massive Government Debt Not Wreaked Havoc (Yet)?
 
Creator Horioka, Charles Yuji; School of Economics, University of the Philippines; National Bureau of Economic Research; and Institute of Social and Economic Research, Osaka University
Nomoto, Takaaki; Office of Regional and Economic Integration, Asian Development Bank
Terada-Hagiwara, Akiko; Economic and Research Department, Asian Development Bank
 
Subject Government debt; government securities; government bonds; government bills; government notes; sovereign debt; debt securities; debt financing; government debt financing; debt holdings; government debt holdings; foreign debt; foreign debt holdings;...
 
Description In this paper, we present data on trends over time in government debt financing in Japan since 2000 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, especially household 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 as 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 make it necessary for Japan to reduce its government debt-to-GDP ratio.  Thus, Japan’s massive government debt has not wreaked havoc in the past because of robust domestic saving and a temporary inflow of foreign capital caused by the Global Financial Crisis, but it may wreak havoc in the future as both of these factors become less applicable unless the government debt-to-GDP ratio can be brought under control.JEL Classification: F32, F34, G15, H63, O53
 
Publisher UPSE Discussion Papers
 
Contributor —
 
Date 2013-10-22
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier http://www.econ.upd.edu.ph/dp/index.php/dp/article/view/714
 
Source UPSE Discussion Papers; 2013
 
Language eng
 
Relation http://www.econ.upd.edu.ph/dp/index.php/dp/article/view/714/923