Comment on “What about Japan?”by Chien, Cole, and Lustig
Makoto SAITO (Nagoya University)

What is new about Chien, Cole, and Lustig’spaper? (1)• They extend the scope and scale of primary fiscal balance byconsidering returns on risky investment by theconsolidated government.
• They pay serious attention to a phenomenon that the consolidated
government earns huge amounts of capital gains through heavily
leveraged positions, about half of which are funded by BOJ at nearzero interest rates.
• In particular, the foreign exchange fund special account within
the central government, and• the social security funds within the general government.
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What is new about Chien, Cole, and Lustig’spaper? (2)• They point out that there are two types of participation
constraints, by which the consolidated government isallowed to finance risky investment at extremely low interestrates.

• Households are kept from participating in domestic and foreign risky
asset markets maybe for transaction costs.
• Commercial banks are kept from investing in foreign long-termbonds maybe for regulatory reasons.

• They demonstrate that as real rates decline, theconsolidated government expands a fiscal space by taxing
less financially sophisticated households.
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My remarks concern…
• They propose a new measure of primary fiscal balance, butthey do not treat extended (market-based) one explicitly.
• Here, I construct time-series of market-based primary fiscal
balance, and examine their findings and implications using
my constructed data.

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The foreign exchange fund special account and the socialsecurity funds indeed hold huge positions of risky assetssuch as equity and foreign assets.

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A careful look at not the past decade (2012FY-), but
the past three decades (1994FY-)!
• Japan’s fiscal policy benefited from the 𝑟𝑟 ≲ 𝑔𝑔 region andasset market booms, resulting from extremely low interest
rate policy in the past decade, but not necessarily in the past
three decades.
average2024/6/8

real GDP growth

real weightedaverage JGB yield

1994-2000

1.4%

3.7%

2001-2010

0.6%

1.8%

2011-2020

0.3%

0.5%

2021-2023

1.9%

-1.3%

1994-2023

1.4%

3.5%
6

Extension of primary fiscal balance• Conventional primary fiscal balance• ∆𝑫𝑫 = − 𝑻𝑻 − 𝑮𝑮 + 𝒓𝒓𝑫𝑫 𝑫𝑫• If 𝑔𝑔 > 𝑟𝑟 𝐷𝐷 , then 𝐷𝐷/𝑌𝑌 is sustainable even with 𝑇𝑇 − 𝐺𝐺 < 0.
• However, 𝑔𝑔 > 𝑟𝑟 𝐷𝐷 is not a long-run case for the Japanese economy.

• Extension of primary fiscal balance treats risky asset-holding
explicitly� + ∆𝑨𝑨 + 𝒓𝒓𝑫𝑫 𝑫𝑫
� + 𝒓𝒓𝑨𝑨 𝑨𝑨 − 𝑮𝑮
• ∆𝑫𝑫 = − 𝑻𝑻
• Even if 𝑔𝑔 < 𝑟𝑟 𝐷𝐷 and 𝑇𝑇� − 𝐺𝐺� < 0, then 𝐷𝐷/𝑌𝑌 is still sustainable with𝑇𝑇� + 𝑟𝑟 𝐴𝐴 𝐴𝐴 − 𝐺𝐺� + ∆𝐴𝐴 > 0.

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Market-based primary fiscal balance (1)• 𝑮𝑮 always includes ∆𝑨𝑨 (net asset purchases) as government
expenditure.
• 𝑻𝑻 usually includes realized 𝒓𝒓𝑨𝑨 𝑨𝑨 as government revenue, but
not unrealized 𝒓𝒓𝑨𝑨 𝑨𝑨 (capital gains/losses).
• Thus,2024/6/8

� + ∆𝑨𝑨
� + 𝒓𝒓𝑨𝑨 𝑨𝑨 − 𝑮𝑮
𝑻𝑻

= 𝑻𝑻 − 𝑮𝑮 + 𝒓𝒓𝑨𝑨𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖 𝑨𝑨
8Market-based primary fiscal balance (2)• Conventional primary fiscal balance� + 𝒓𝒓𝑨𝑨𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓 𝑨𝑨 − 𝑮𝑮 has been negative in the past• 𝑻𝑻 − 𝑮𝑮 = 𝑻𝑻
three decades, and it may continue to be negative incoming decades in Japan.

• Market-based primary fiscal balance• 𝑻𝑻 − 𝑮𝑮 + 𝒓𝒓𝑨𝑨𝒖𝒖𝒖𝒖𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓 𝑨𝑨 is not necessarily negative.

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Constructing time-series of market-based
primary fiscal balance𝐴𝐴• Let us obtain 𝑟𝑟𝑢𝑢𝑢𝑢𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
𝐴𝐴 (capital gains/losses) from BOJ
flow of funds, tables of reconciliation between flows andstocks for the consolidated government.

• The flow tables are valued on a transaction basis, while the stocktables are marked to the market. Thus, a difference between thetwo tables represent unrealized returns.

• Consolidated public debt is computed for the general
government, BOJ, and public financial institutions, withcross-holding of government bonds among the three
categories cancelled out.
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10Large capital gains changed conventional primary balance fromnegative to positive, but large capital losses deepened fiscal deficit.

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A more careful look at the data…
• Excess returns on consolidated public debt are defined asover 1-year JGB yield.
• According to average behavior (1994-2022)
1994-2022

averagestandard deviation

excess equity return

+4.0%

25.0%

excess return on conventional primary fiscal
balance/consolidated public debt

-1.4%

1.0%

excess return on market-based primaryfiscal balance/consolidated public debt

-1.1%

2.0%

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12What we find from a beta regression is significant, butslightly positive beta with a largely negative intercept.

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The consolidated government has been forced to bear negative
excess returns on their debt positions on the average, despite
holding huge amounts of domestic and foreign risky assets.
Excess returns of market-based primary fiscal balance0%Large deficit from conventional
primary balance (-1.3%)-1.1% (average)-1.3% (intercept)

4% (average)

Excess equity returns

𝜷 = −𝟎. 𝟎𝟓

Small surplus from very smallbeta of market-based primarybalance (-1.3% -1.1%, +0.2%)2024/6/8

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Lessons from the inclusion of unrealized capital gains/losses incomputing primary fiscal balance for the consolidated government (1)• Important to distinguish between• a phase of asset market booms, which were accompanied by low
interest rate policy, and• a phase of asset market slumps, which were caused by domestic
and global financial crises, large-scale natural disaster, and Chinashocks.

• In the boom phase with declining real interest rates,• Huge capital gains from risky asset investment improved Japan’s
fiscal positions remarkably.
• But inequality became grievous between those holding risky assets
and not holding them.

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Lessons from the inclusion of unrealized capital gains/losses incomputing primary fiscal balance for the consolidated government (2)• In the long-run, however, capital gains are almost cancelled out
by capital losses.
• Thus, the consolidated government still faces large deficit fromconventional primary fiscal balance on the average.

• Whether Japan’s fiscal policy is sustainable or not remains unsolved, given
𝑟𝑟 > 𝑔𝑔 in the long-run.

• I completely agree with the authors’ ‘financial repression’interpretation of the current state of Japan’s fiscal and monetarypolicy.
• Those who hold bank deposits only are currently and heavily taxed underfinancial repression.

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My final comment: We are still trapped in financial repression evenafter a negative interest rate policy and YCC were lifted last March.

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