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Japans public debt sustainability before and after COVID-19

In: The Sustainability of Asia’s Debt

Author

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  • Jérémie Cohen-Setton
  • Keita Oikawa

Abstract

Japan's debt level has reached unprecedented levels. And yet, its debt has never been so cheap. Such disconnect between debt levels and debt service costs illustrates how the decline in interest rates has made traditional metric for assessing fiscal sustainability obsolete. Interest rates could, however, increase especially after the increase in debt associated with the coronavirus disease (COVID-19) pandemic. But neither bond markets nor plausible assumptions about the impact of the higher debt on interest rates suggest that the favorable interest rate-growth rate differential will be reversed for Japan. Japan will thus continue to be able to stabilize its debt-to-GDP ratio while running large primary deficits. For less advanced economies with weaker institutions and more foreign currency-denominated debt, the buildup in government debt during COVID-19 will, however, expose them further to reversals in funding conditions.

Suggested Citation

  • Jérémie Cohen-Setton & Keita Oikawa, 2022. "Japans public debt sustainability before and after COVID-19," Chapters, in: Benno Ferrarini & Marcelo M. Giugale & Juan J. Pradelli (ed.), The Sustainability of Asia’s Debt, chapter 2, pages 66-86, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:20587_2
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    Cited by:

    1. Alberola, Enrique & Cheng, Gong & Consiglio, Andrea & Zenios, Stavros A., 2023. "Unconventional monetary policy and debt sustainability in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 69(C).

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