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Why Has Japan's Massive Government Debt Not Wreaked Havoc (Yet)?

  • Charles Y. Horioka
  • Takaaki Nomoto
  • Akiko Terada-Hagiwara

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 create increasing pressures for fiscal adjustment to reduce her massive government debt. Thus, Japan's massive government debt has not resulted in high economic costs in the past because of robust domestic saving and a temporary inflow of foreign capital caused by the Global Financial Crisis, but it may have substantial costs in the future as both of these factors become less applicable unless the government debt can be brought under control.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19596.

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Date of creation: Oct 2013
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Handle: RePEc:nbr:nberwo:19596
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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," CEMA Working Papers 595, China Economics and Management Academy, Central University of Finance and Economics.
  2. Yuji Horioka, Charles, 0. "Why is Japan's Household Saving Rate So High? A Literature Survey," CEPR Publications, Stanford University, Center for Economic Policy Research.
  3. Harioka, C.Y., 1995. "A Cointegration Analysis of the Impact of the Age Structure of the Population on the Household Saving Rate in Japan," ISER Discussion Paper 0384, Institute of Social and Economic Research, Osaka University.
  4. Horioka, C.Y., 1989. "The Determinants Of Japan'S Saving Rate: The Impact Of The Age Structure Of The Population And Other Factors," ISER Discussion Paper 0189, Institute of Social and Economic Research, Osaka University.
  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.
  6. Horioka, Charles Yuji & Terada-Hagiwara, Akiko, 2012. "The determinants and long-term projections of saving rates in Developing Asia," Japan and the World Economy, Elsevier, vol. 24(2), pages 128-137.
  7. Horioka, Charles Yuji, 1992. "Future trends in Japan's saving rate and the implications thereof for Japan's external imbalance," Japan and the World Economy, Elsevier, vol. 3(4), pages 307-330, April.
  8. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA.
  9. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  10. Charles Yuji Horioka & Akiko Terada- Hagiwara, 2013. "Savings and investment," Chapters, in: Asia Rising, chapter 5, pages 137-153 Edward Elgar Publishing.
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