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What about Japan?

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Over the last decade, the Japanese public sector has primarily borrowed at floating rates while investing in longer-duration risky assets, earning an annual return exceeding 6% of GDP above its funding costs. We quantify the impact of Japan’s low-rate policies on its government and households. The government duration mismatch expands fiscal space when real rates fall, helping the government fulfill promises to older households. A typical younger Japanese household does not have enough duration in its portfolio to continue to finance its spending plan and will be worse off. Low-rate policies tend to tax younger and less financially sophisticated households.

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  • YiLi Chien & Harold L. Cole & Hanno Lustig, 2023. "What about Japan?," Working Papers 2023-028, Federal Reserve Bank of St. Louis, revised 11 Mar 2025.
    • Handle: RePEc:fip:fedlwp:97227
    DOI: 10.20955/wp.2023.028
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    1. Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2022. "Measuring US Fiscal Capacity Using Discounted Cash Flow Analysis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 53(2 (Fall)), pages 157-229.
    2. Karolyi, G Andrew & Stulz, Rene M, 1996. "Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements," Journal of Finance, American Finance Association, vol. 51(3), pages 951-986, July.
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    4. Steven Ongena & Alexander Popov & Neeltje Van Horen, 2019. "The Invisible Hand of the Government: Moral Suasion during the European Sovereign Debt Crisis," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 346-379, October.
    5. Atif Mian & Ludwig Straub & Amir Sufi, 2021. "A Goldilocks Theory of Fiscal Policy," Working Papers 2021-37, Princeton University. Economics Department..
    6. Hanno Lustig & Andreas Stathopoulos & Adrien Verdelhan, 2019. "The Term Structure of Currency Carry Trade Risk Premia," American Economic Review, American Economic Association, vol. 109(12), pages 4142-4177, December.
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    Cited by:

    1. Fabrice Collard & Michel Habib & Ugo Panizza & Jean-Charles Rochet, 2024. "Sovereign Debt Sustainability with Involuntary Default," Working Papers hal-04822341, HAL.

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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