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Japan's Debt Puzzle: Sovereign Wealth Fund from Borrowed Money

Author

Listed:
  • Yili Chien
  • Wenxin Du
  • Hanno Lustig

Abstract

We analyze the risks associated with Japan's prolonged low-interest rate policies amid a global environment of rising rates. To finance its persistent deficits, the Japanese public sector depends on inexpensive domestic funding to invest in risky assets both domestically and internationally, effectively creating a sovereign wealth fund fueled by borrowed money. Ultimately, these risks fall on Japanese bondholders, depositors, and taxpayers. While the United States faces similar fiscal pressures, it is unlikely to adopt Japan's approach.

Suggested Citation

  • Yili Chien & Wenxin Du & Hanno Lustig, 2025. "Japan's Debt Puzzle: Sovereign Wealth Fund from Borrowed Money," Journal of Economic Perspectives, American Economic Association, vol. 39(4), pages 3-26, Fall.
    • Handle: RePEc:aea:jecper:v:39:y:2025:i:4:p:3-26
    DOI: 10.1257/jep.20251452
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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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