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Table of Contents

Vol. 146 :Analysis of Government Debt and Debt Management in Japan

Summary of Articles

Incomplete Market and Optimal Debt in an Economy with an Overlapping Generation Structure

By INO Akio (Lecturer, Faculty of International Social Sciences, Division of International Social Sciences, Yokohama National University)
By KOBAYASHI Keiichiro (Research director, Tokyo Foundation for Policy Research)

Aiyagari and McGrattan (1998) pointed out that in an incomplete market model, government debts may help to level out consumption by serving as a means of household savings and thereby improve social welfare. Aiyagari and McGrattan stated that issuing a certain quantity of government debts is an optimal option. A similar analysis was conducted by Nakajima and Takahashi (2017) with respect to Japan.

Aiyagari and McGrattan's model assumed an indefinite period of life for individuals. However, Peterman and Sager (2018) pointed out that if a definite period of life is assumed for individuals, the optimal quantity of government debts is a negative figure because demand for savings declines compared with in the case of individuals with an indefinite period of life. In addition, in Aiyagari and McGrattan's argument, the comparison was conducted only under stationary equilibrium and the cost that arises during the transition path in which the debt quantity changes was overlooked. This paper conducts a review of existing literature on those two points.

Keywords: government debt, incomplete market, overlapping generation structure, transition path

JEL Classification: H6, E21, E6

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Government Debt and Macroeconomy
—Introduction of Analyses Based on Heterogeneous Household Model—

By TAKAHASHI Shuhei (Associate Professor, Kyoto Institute of Economic Research)

This paper examines the effects of government debts on the macroeconomy and welfare using a dynamic general equilibrium model that takes into consideration the heterogeneity of households. Under this model, there are many households with different levels of labor productivity (wages). As households face uncertainty over labor productivity, they try to smooth consumption and leisure by adjusting their assets and working hours. As a result, inequality arises between households in terms of consumption, leisure, income and assets. If the ratio of government debts to GDP rises over a long term in this situation, interest rates increase while the ratio of capital to GDP falls. If welfare is evaluated through a standard method, a rise in the ratio of government debts to GDP has the effect of improving welfare by reducing uncertainty over consumption and leisure but, on the other hand, it also has the effect of impairing welfare by expanding inequality. The extent of those effects depends on the level of labor productivity risk and the scale of income transfer.

Keywords: government debt, macroeconomy, heterogeneity of households, welfare, general equilibrium

JEL Classification: E62, H63

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Sovereign Debt Restructurings: Survey on Concepts, Trends, Empirics, Theory and Policies

By ASONUMA Tamon (Economist, International Monetary Fund)
By Hyungseok Joo (Lecturer, Department of Economics, University of Surrey)
By SASAHARA Akira (Associate Professor, Faculty of Economics, Keio University)

Many sovereign debtors have accumulated privately-held external debt—borrowed from private creditors abroad. Sovereign debt restructurings might take place once these debtors suffer a sovereign debt crisis. The current paper provides a comprehensive survey covering three aspects of sovereign debt restructurings: theory, empirics, and policy. First, we define basic concepts and the process of sovereign debt restructurings and overview recent trends in the last decade. Second, we explain empirical findings and theoretical implications on three issues: (i) the process and outcomes under preemptive debt restructurings—sovereigns restructure debt before default, i.e., missing payments—; (ii) how foreign creditors’ business and financial cycles affect the process and the outcome of debt restructurings; and (iii) impacts of debt restructurings on the domestic economy and future borrowing. Lastly, the paper discusses recently endorsed IMF policies on sovereign debt.

Keywords: sovereign debt, external debt, sovereign default, debt restructuring

JEL Classification: F34, F41, H63

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Examining the Legal Framework for the Government Debt Management Policy in Japan

By FUJITANI Takeshi (Professor, Institute of Social Science, The University of Tokyo)

This paper examines issues surrounding the design of legal frameworks for government debt management policy. Government debt management policy here refers to the strategy to implement the optimal structure of government debt under a given size of debt stock, and a reasonable legal framework is a prerequisite for such debt management policy to function well.

First, the paper reviews the recent development over the legal frameworks for government debt management policy and points out four legal design issues: (i) allocation of the authority to issue public debts; (ii) clarification of the relationship between debt management policy and other relevant policies (monetary policy in particular); (iii) the authorities and organization of the debt management organization; and (iv) the transparency and accountability of debt management policy.

Second, drawing on the international and comparative perspectives, this paper uncovers some characteristics of Japan’s legal framework for government debt management policy, such as extensive involvement of the Diet (parliament) with the debt issuance and redemption, as well as the (comparatively rare) existence of sinking fund. It is also noted that the design for the legal framework of government debt management policy is closely intertwined with Japan’s budgetary law institution.

Keywords: government debt management, diet authorization for borrowing, budgetary principle of universality (gross budgeting), sinking fund reserves

JEL Classification: H61, H63, K39

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Liquidity of Government Bond Market and Monetary Policy: Recent Research Trends

By UNO Jun (Professor, Graduate School of Business and Finance, Waseda Business School)
By TOBE Reiko (Lecturer, Graduate School of International Politics and Economics, Nishogakusha University)

Over the past decade, researches have increased markedly in the field of the liquidity in the sovereign debt market. A series of financial crises since 2007 make the market participants strongly recognize the importance of the credit risk on liquidity in the global financial markets. The factors behind this recognition include: the presence of fast-moving global investors whose activities sweep through global financial markets; the drastic increase in the inflow of money into and out of the government bond market in the developed countries facing an economic or fiscal crisis; and the ongoing implementation of aggressive monetary policies by the central banks for the purpose of mitigating the effects of the crises and achieving economic recovery. Since massive asset purchases by the Japanese, U.S. and European central banks have had a significant impact not only on the bond price but also on the market liquidity in the government bond market, theoretical and empirical research has been active in recent years. In Japan, with large government debt outstanding, it is well conceivable that in the future, concerns will be raised over the credit risk of Japanese government bonds, leading to the drying-up of market liquidity. Therefore, it is very important to review the current situation in reference to recent studies.

Keywords: government bond market, liquidity, credit risk, scarcity, asset purchases

JEL Classification: G01, G12, G14

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Estimating the Yield Curve Using the Nelson-Siegel Model: Evidence from Daily Yield Data

By SEKINE Atsushi (Associate Professor, Graduate School of Social Sciences, Chiba University)

Since 2000, Japanese government bond yields have been very low. In this study, I estimate the yield curve using the Nelson-Siegel model with the daily yield data in Japan. This estimation focuses on the changes in the decay factor and examines how the estimated values of the level, slope and curvature factors change. Based on the Nelson-Siegel model, I conduct the estimation using two methods—a linear estimation method under which the decay factor remains fixed, and a non-linear estimation method under which the factor is estimated every period. I find that the latter method achieves much more precise estimation. This finding is prominent particularly under a low-interest-rate environment like the one that was observed in the 2010s. In addition, the estimation shows that the decay factor started decreasing gradually from the day when the BOJ decided to introduce QQE (quantitative and qualitative monetary easing) and that the level factor fell steeply immediately after the decision to introduce the negative interest policy. Moreover, the volatility of the decay factor decreased after the introduction of yield curve control.

Keywords: zero-coupon bond, yield curve, Nelson-Siegel model, non-linear estimation

JEL Classification: E43, E44, E47

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Government Debt Management and the Maturity Structure of Government Bonds in Japan

By KOEDA Junko (Former Chief Economist, Policy Research Institute, Ministry of Finance)

The Japanese government’s debt consists almost entirely of bonds. Using the maturity structure database constructed by Koeda and Kimura (2021), this study investigates the evolution of the Japanese government’s bond management policy from the fiscal year 1965 (when the de facto post-WWII government bond management policy began) to the present (fiscal year 2019). It also reviews related literature on Japanese debt-management policies.

This study is the first study that identifies the different phases of the debt-management policy over a half a century based on structural breaks on the maturity structure dynamics: Phase I (FY1965– 1975, early market development); Phase II (FY1976–1998, stabilizing the maturity structure); Phase III (FY1999–2012, further market developments); and Phase IV (FY2013–2019, increased Bank of Japan’s long-term bond purchases). Some interesting observations include the fact that took a decade for the maturity structure to stabilize (Phase I) and that the share of short-term maturities increased significantly in the late 1990s (Phase III).

The study further examines the dynamics of the maturity structure (based on principal amounts) by estimating a simple vector autoregression model as well as a structural term structure model with preferred habitat investors. The VAR analysis indicates that the government tends to issue shorter maturities during a severe recession. Consistent with Koeda and Kimura (2021), the structural estimation results suggest that the supply factor extracted from the maturity structure data has declined over the past 30 years, lowering long-term interest rates. Concurrently, it was indicated that when a positive supply shock has occurred, there is a high risk of an interest rate hike.

Keywords: government bond management policy, maturity structure, factor model

JEL Classification: G12, H63

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Ministry of Finance, Policy Research Institute.