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Why has Japan’s Massive Government Debt Not Wreaked Havoc (Yet)?

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Author Info

  • Charles Yuji Horioka

    (School of Economics, University of the Philippines; National Bureau of Economic Research; and Institute of Social and Economic Research, Osaka University)

  • Takaaki Nomoto

    (Office of Regional and Economic Integration, Asian Development Bank)

  • Akiko Terada-Hagiwara

    (Economic and Research Department, Asian Development Bank)

Abstract

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 make it necessary for Japan to get its fiscal house in order. 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 can be brought under control.

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File URL: http://www.econ.upd.edu.ph/dp/index.php/dp/article/view/714/187
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Bibliographic Info

Paper provided by University of the Philippines School of Economics in its series UP School of Economics Discussion Papers with number 201310.

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Length: 27 pages
Date of creation: Oct 2013
Date of revision:
Publication status: Published as UPSE Discussion Paper No. 2013-10, October 2013
Handle: RePEc:phs:dpaper:201310

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Keywords: 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; foreign debt investments; foreign investors; capital flows; international capital flows; short-term capital movements; cross-border portfolio investments; safe haven; capital flight; flight to safety; debt rollover; home bias; sovereign debt crisis; eurozone crisis; eurozone; Japan;

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  1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA.
  2. Charles Yuji Horioka & Akiko Terada-Hagiwara, 2011. "The Determinants and Long-term Projections of Saving Rates in Developing Asia," NBER Working Papers 17581, National Bureau of Economic Research, Inc.
  3. Horioka, Charles Yuji, 1990. "Why is Japan's household saving rate so high? A literature survey," Journal of the Japanese and International Economies, Elsevier, vol. 4(1), pages 49-92, March.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
  5. Apergis, Nicholas & Tsoumas, Chris, 2009. "A survey of the Feldstein-Horioka puzzle: What has been done and where we stand," Research in Economics, Elsevier, vol. 63(2), pages 64-76, June.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. High Japanese debt will become a problem
    by Economic Logician in Economic Logic on 2013-11-22 15:52:00

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