Asset Pricing Interpretations of the Primary Fiscal Balance : The Case of Japan

Chien et al. (2025) state controversially that the Japanese government has exploited available arbitrage opportunities, and that it has backed its huge liabilities by high 𝛽 financial assets and fiscal claims. A major empirical ground for their statement is that the government reduced its net liabilities substantially by earning enormous capital gains from domestic and foreign risky assets from the mid-2010s through to the mid-2020s. Employing a net liability version of the primary fiscal balance (PFB), we prove theoretically that only if arbitrage opportunities are available to the government, high 𝛽 assets and claims the government is currently holding may improve the discounted PFB. However, we empirically demonstrate that there is no strong evidence for the presence of arbitrage opportunities for the government, and that its net positions bear at most moderate 𝛽 . These theoretical and empirical findings contradict Chien et al.’s statement.