The real interest rate Japan pays on its debt has fallen steadily. With short-term interest rates now negative, the country gets paid to borrow for short periods. The interest bill is even more manageable after factoring in revenues from Japan’s foreign exchange reserves and other public financial assets. As a result, economic stimulus under Mr Abe has finally stabilised Japan’s debt after years of relentless increase. It was 237 per cent of GDP in 2012. The International Monetary Fund forecasts 232 per cent of GDP for 2022.
Low interest rates mean the existing debt simply does not matter that much for fiscal sustainability. More importantly, and belying its reputation for wasteful public works, Japan has made a series of tough decisions on healthcare and pension spending. Real per capita outlays on the elderly have fallen. Tax revenues are up by six percentage points of GDP since 2000. “If this approach continues,” write Mr Weinstein and Mr Greenan, “Japan may very well avoid either a financial crisis or a major inflationary episode.”
That is from Robin Harding at the FT.