Sustainable large debts in Japan

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at:, or follow me on Twitter.

The math here is a bit tricky:

Moreover, the Bank of Japan owns government bonds worth 90% of GDP, and ultimately returns to the government as dividends all the money it receives from the government as interest on the bonds it holds. Deducting both public financial assets and all the debts the Japanese government and people effectively owe to themselves, the debt level is only about 60% percent of GDP and not rising. This level of debt could be sustainable even if fiscal deficits remain high for many years.

To see why, suppose a country had gross government debt of 250% of GDP, net debt of 150%, and central bank bond holdings of 100% of GDP, leaving net debt of 50%. Then suppose that inflation and real growth were steady at 1% each, so that nominal GDP grows at 2%. With bond yields at 2% (versus 0.1% in Japan today), those debt ratios would remain stable even if the government ran a primary deficit of 4% of GDP, and a total deficit of 5%, year after year.

That is roughly what Japan is doing now. Far from reacting in horror at this clearly unsustainable behavior, bond buyers around the world still line up to buy government bonds in return for yields that are little more than zero.

Why is 5% total deficit sustainable? I had to think about that for awhile. Nominal growth is 2%, so subtract that from 5% and you are down to 3%. But how does that 3% disappear? If 2% is being paid on the bonds and Japan owns bonds worth 100% of GDP, the government gets payments worth 2% of GDP. So that knocks the 3% down to 1%. But it seems there is still 1% that is unsustainable? I think the author makes the assumption that only the primary deficit of 4% needs to be paid for? The extra 1% is for interest payments, most of which go to the government, so they don’t really count?

Post external references

  1. 1