Revised Paper by Takeo Hoshi on Japan's Debt
Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?
06/13/2012
Takeo Hoshi and Takatoshi Ito,
The National Bureau of Economic Research
Recent academic papers have shown that the Japanese sovereign debt situation is not sustainable. The puzzle is that the bond rate has remained low and stable. Some suggest that the low yield can be explained by domestic residents' willingness to hold Japanese government bonds (JGBs) despite its low return, and that as long as domestic residents remain home-biased, the JGBs are sustainable. About 95 percent of JGBs are owned by domestic residents. Hoshi and Ito argue that even with such dominance of domestic investors, a crisis would happen if the amount of government debt breaches the ceiling imposed by the domestic private sector financial assets. Their simulation is conducted on future paths of household saving and fiscal situations, and shows that the ceiling would be breached in the next ten years or so without a drastic fiscal consolidation.
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Takeo Hoshi is the Pacific Economic Cooperation Professor in international economic relations at IR/PS, and a research associate at the National Bureau of Economic Research (NBER) and at the Tokyo Center for Economic Research (TCER). His major research area is the study of the financial aspects of the Japanese economy, especially corporate finance and governance.
