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The Optimum Quantity of Debt for Japan

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  • Tomoyuki Nakajima

    (Institute of Economic Research, Kyoto University)

  • Shuhei Takahashi

    (Institute of Economic Research, Kyoto University)

Abstract

Japan's net government debt reached 130% of GDP in 2013. The present paper analyzes the welfare implications of the large debt for Japan. We use an Aiyagari (1994)-style heterogeneous-agent, incomplete-market model with idiosyncratic wage risk and endogenous labor supply. We find that under the utilitarian welfare measure, the optimal government debt for Japan is -50% of GDP and the current level of debt incurs the welfare cost that is 0.22% of consumption. Decomposing the welfare cost by the Floden (2001) method reveals substantial welfare effects arising from changes in the level, inequality, and uncertainty. The level and inequality costs are 0.38% and 0.52% respectively, whereas the uncertainty benefit is 0.68%. Adjusting consumption taxes instead of the factor income taxes to balance the government budget substantially reduces the overall welfare cost.

Suggested Citation

  • Tomoyuki Nakajima & Shuhei Takahashi, 2017. "The Optimum Quantity of Debt for Japan," UTokyo Price Project Working Paper Series 075, University of Tokyo, Graduate School of Economics.
    • Handle: RePEc:upd:utppwp:075
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    5. Hansen, Gary & İmrohoroğlu, Selahattin, 2018. "Replacing income taxation with consumption taxation in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 48(C), pages 15-28.
    6. Nakajima, Tomoyuki & Takahashi, Shuhei, 2022. "Uninsured idiosyncratic risk and the government asset Laffer curve," Journal of Macroeconomics, Elsevier, vol. 71(C).
    7. Alberola, Enrique & Cheng, Gong & Consiglio, Andrea & Zenios, Stavros A., 2023. "Unconventional monetary policy and debt sustainability in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 69(C).
    8. Yoshida, Motonori, 2023. "Chronological changes of government sectors’ fiscal policies and fiscal sustainability in Japan," Japan and the World Economy, Elsevier, vol. 66(C).
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    More about this item

    Keywords

    Government debt; welfare; incomplete markets; Japanese economy.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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