Takeo Hoshi's New Paper on Japan's Fiscal Crisis
How long can Japanese bond prices defy gravity?
James Hamilton, Econbrowser
Although there has been much discussion recently of debt levels of some European governments, Japan is in a class by itself. Hoshi and Ito (2012) note the consensus among academic researchers that Japan's current fiscal path is unsustainable:
Doi (2009), Doi, Hoshi, and Okimoto (2011), Doi and Ihori (2009), Sakuragawa and Hosono (2011), Ito (2011), Ito, Watanabe, and Yabu (2011), and Ostry et al. (2010) all find that without a drastic change in fiscal policy, the Japanese government debt to GDP ratio cannot be stabilized.
Nevertheless, lenders to the Japanese government seem to have no concerns, as yields on the government's debt remain extremely low.
Hoshi and Ito (2012) argue that the key feature that has kept this process going has been that 95% of the Japanese government debt is domestically owned. Japanese residents put their savings into banks and insurance companies who along with pension funds lend to the government at very low rates. But as more Japanese retire from the workforce, that is likely to change dramatically. When Hoshi and Ito extrapolated current saving rates associated with different age groups into the future as the population ages, here is what they predict will happen to the Japanese saving rate in the years ahead.
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.
How Long Can Japanese Bond Prices Defy Gravity? – Seeking Alpha
Defying gravity – The Economist