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

  • 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)

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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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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  1. 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.
  2. 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.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  4. 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.
  5. 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.
  6. Charles Yuji Horioka, 2000. "A Cointegration Analysis of the Impact of the Age Structure of the Population on the Household Saving Rate in Japan," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 511-516, August.
  7. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  8. Maurice Obstfeld & Kenneth Rogoff & Ben Bernanke & Kenneth Rogoff, . "The Six Major Puzzles in International Macroeconomics: Is there a Common Cause?," Working Paper 32326, Harvard University OpenScholar.
  9. 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.
  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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