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What about Japan?

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As a result of the Bank of Japan's large-scale asset purchases, the consolidated Japanese government borrows mostly at the floating rate from households and invests in longer-duration risky assets to earn an more than 3% of GDP in expectation. We quantify the impact of Japan's low-rate policies on its government and households. Because of the duration mismatch on the government balance sheet, the government's fiscal space expands when real rates decline, allowing the government to keep its promises to older Japanese households. A typical younger Japanese household does not have enough duration in its portfolio to continue to finance its spending plan and will be worse off. Low-rate policies tend to tax younger and less financially sophisticated households.

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  • YiLi Chien & Harold L. Cole & Hanno Lustig, 2023. "What about Japan?," Working Papers 2023-028, Federal Reserve Bank of St. Louis, revised 12 Jul 2024.
    • Handle: RePEc:fip:fedlwp:97227
    DOI: 10.20955/wp.2023.028
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    as
    1. Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2022. "Measuring US Fiscal Capacity Using Discounted Cash Flow Analysis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 53(2 (Fall)), pages 157-229.
    2. Steven Ongena & Alexander Popov & Neeltje Van Horen, 2019. "The Invisible Hand of the Government: Moral Suasion during the European Sovereign Debt Crisis," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 346-379, October.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    4. Atif Mian & Ludwig Straub & Amir Sufi, 2021. "A Goldilocks Theory of Fiscal Policy," Working Papers 2021-37, Princeton University. Economics Department..
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    More about this item

    Keywords

    fiscal policy; monetary policy; public debt sustainability; financial repression;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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