The Sustainability of Japan’s Government Debt:
A Review
Tomomi Miyazaki
Kazuki Onji

July 2017
Discussion Paper No.1716

GRADUATE SCHOOL OF ECONOMICS
KOBE UNIVERSITYROKKO, KOBE, JAPANThe Sustainability of Japan’s Government Debt: A Review
Tomomi Miyazaki
Kazuki Onji

1. Introduction
Over the last two decades, Japan has been overwhelmed by enormous government debt
and significant budget deficits. The central government of Japan has been runningbudget deficits since the early 1990s and by the end of FY 2016, government debt
outstanding accumulated to over 800 trillion yen (approximately USD 8 trillion). As aresult, the general government’s (central and local) gross debt-to-GDP ratio was as highas 230% in 2014 (see Figure 1), which is the highest among some developed countries.1
Reflecting this public financial condition, both media and practitioners are skeptical
about the Japanese government’s solvency.
Researchers also have employed various methods to examine the fiscal sustainabilityof the Japanese government, or whether the government satisfies the intertemporalgovernment budget constraints, giving rise to several strands within the literature,each focusing on a specific method. While specialization has enabled refinement, thetechnicality of discussion is not necessarily conducive for a policy audience. Our firstgoal in this paper is to offer an overview of the approaches and the key findings.

 Associate professor, Graduate School of Economics, Kobe University.

E-mail: miyazaki@econ.kobe-u.ac.jp
 Professor, Graduate School of Economics, Osaka University.
1

It is also possible to use net financial liability data, which subtracts assets held by the Japanese
government. The figure is 130% of GDP in 2014, which seems to look better than the gross financial
assets, and is the second largest, next to Italy. However, please note that it was highest between 2008
and 2013 among the 7 countries listed in Figure 1.

1

Figure 1. Comparison of debt-to-GDP ratio (central and local governments, grossfinancial liabilities) among some developed countries
Canada%FranceGermany

Italy

Japan

UK

US

250

200

150

100

50

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

0

Source: OECD Economic Outlook, Vol. 2016 (1).

Incidentally, there seem to be no symptoms of a sovereign risk in Japan, following theperiod of deflation and lower rate of yields on Japanese government bonds (JGBs). Someeconomists attribute this to the fact that domestic investors share the larger part of the
JGB issuance, as shown in Figure 2. However, Tokuoka (2010) expects the interest rate
on JGBs to rise, as the proportion of non-resident holdings of JGB could eventually
increase. Following Tokuoka’s (2010) results, we cannot rule out the possibility of the
JGB yield soaring if foreign investors increase by a fraction. To discuss this, we
introduce the arguments of Hoshi and Ito (2012), as they predict that foreign investors’share of JGBs could exceed beyond domestic ownership.

2

Figure 2. Share of JGB holdings (December 2016)
others 3.1%

Households 1.2%
Public Pensions
4.5%

Bank 19.4%
Foreign 10.5%

Life & Non-life
insurance&
Pension Funds
22.2%

BOJ 39.1%

Source: Flow of Funds Statistics, Q4 2016 (Preliminary Estimation), Bank of Japan.

Further, a sovereign debt crisis could have occurred even if a country is solvent. Some
theoretic analyses on debt and currency crises clarify this. For example, Morris and Shin (2004)
show that coordination problems among investors can cause them to flee en masse,
triggering a debt crisis. Debt holders may be correctively better off by holding on tobonds. However, once a crisis occurs, an agent is worse off by holding on to bonds. Then,the holder would rather sell out before the bond becomes worthless. A lack of
coordination can lead each debt holder to sell out preemptively, thereby creating a crisis.
We discuss this argument based on the findings of Onji et al. (2012) that government
intervention in Japan could mitigate such coordination problems, and examine how
government withdrawal from the JGBs could roil the market.
Section 2 surveys the studies that examine the sustainability of government deficit byfocusing on three approaches: the track record of government budget, relevance with3

economic growth, and the predictions of tax and social security burden to national
income or GDP. Sections 3 summarizes the arguments of Hoshi and Ito (2012), who
examine the relationship between the share of JGB foreign investors and the tipping
point of a “fiscal crisis”— they define this as the stage when domestic savings cannot
absorb government deficit entirely. Section 4 introduces the issues of a possible
sovereign debt crisis even when a country is solvent, emphasizing the active role thegovernment has been playing in the JGB market since its inception, following Onji et al.
(2012). Section 5 concludes the paper.

2. Sustainability analysis
In a simple case, the “sustainability” of government budget deficit relates to whether
or not the No-Ponzi Game (NPG) condition, equivalent to the intertemporal government
budget constraint (IBC), holds. We explain this using the framework proposed byMiyazaki (2014).
The government's one-period budget constraint is written as follows.

(1)∆𝐵𝑡 = 𝐺𝑡 + 𝑟𝑡 𝐵𝑡−1 − 𝑅𝑡 ,where 𝑅𝑡 is government revenue, 𝐺𝑡 non-interest spending, and 𝑟𝐵𝑡−1 interest
payment on debt. To put it simply, it is assumed that interest rate 𝑟𝑡 is stationaryaround its mean r. Based on this assumption, we define the following: 𝐺𝑡∗ = 𝐺𝑡 +(𝑟 − 𝑟𝑡 )𝐵𝑡−1 . This expression is used to rewrite Equation (1) as follows.

4

(2)

𝐺𝑡∗ + (1 + 𝑟)𝐵𝑡−1 = 𝑅𝑡 + 𝐵𝑡 .

Rewriting equation (2) for subsequent periods and expressing debt yields:

1

1

(3)

𝐵𝑡 = (1+𝑟) 𝑆𝑡+𝑗+1 + (1+𝑟) 𝐵𝑡+𝑗+1 .

∗where 𝑆𝑡+𝑗+1 = 𝑅𝑡+𝑗+1 − 𝐺𝑡+𝑗+1. Then, solving the resulting equations recursively, ityields the following intertemporal budget constraint as follows.

1

1

𝐵𝑡 = ∑∞
𝑗=0 (1+𝑟)𝑗+1 𝑆𝑡+𝑗+1 + lim (1+𝑟)𝑗+1 𝐵𝑡+𝑗+1 .
𝑗→∞

(4)

By taking conditional expectations, we can write equation (4) as:1

1

𝐵𝑡 = ∑∞
𝑗=0 (1+𝑟)𝑗+1 𝐸𝑡 [𝑆𝑡+𝑗+1 ] + lim (1+𝑟)𝑗+1 𝐸𝑡 [𝐵𝑡+𝑗+1 ].
𝑗→∞

(5)

Equation (5) demonstrates that initial debt equals the expected present value of futurebudget surpluses if and only if discounted future debt converge to zero. That is:

1(6)

𝐵𝑡 = ∑∞
𝑗=0 (1+𝑟)𝑗+1 𝐸𝑡 [𝑆𝑡+𝑗+1 ]must be equivalent to the following:

5

lim

1

𝑗→∞ (1+𝑟)𝑗+1(7)

𝐸𝑡 [𝐵𝑡+𝑗+1 ] = 0

Equation (6) is known as the IBC and Equation (7) as the NPG condition. Intuitively,
Equation (6) means that if a government can run sufficient surpluses to repair the
initial debt outstanding, then such a government is solvent as it satisfies the NPG
condition. The arguments developed in Section 2.1 directly relate to this problem.
Further, all frameworks presented in Sections 2.2 and 2.3 presume that IBC holds.
The approach to examine the sustainability of government deficit is threefold;analyzing the time series properties of the fiscal variables, the relevance with economic
growth of the possibility of a “deficit gamble” and the calculation of fiscal surplus torestore sustainability, and the predictions of future tax and social security burden.”2

2.1 Is the Japanese government behaving as it should?
The earliest approach in checking the sustainability of government deficit is to see
whether the government has been acting prudently by reducing debt when the levels
are high. The idea is that the researcher checks the government’s record ofaccomplishment by employing the time series data on public debt and budget surplus toascertain if the government can pay off the debt eventually. While it is difficult to
examine how the budget deficit affects the welfare of economic agents and the financial
market, this approach is informative in that researchers can clarify whether or not the
government’s intertemporal budget constraint holds through an econometric2

Many studies have been using these approaches other than the ones introduced in this section.
However, even though there are a few exceptions, we would like to focus on papers published ininternational journals to provide information to researchers in foreign countries.

6

investigation of government budget data. There are two approaches, as elaborated in
Bohn (2008): the ad hoc approach, and the model-based approach.
The ad hoc approach enables us to examine whether or not fiscal policy is on a pathsuch that the present value of expected future primary surplus equals the initial debt asshown in Equation (6). Typically, researchers examine the cointegration relationshipbetween government revenues (𝑅𝑡 ) and total government expenditure (the sum of
non-interest spending (𝐺𝑡 ) and interest payment on the debt (𝑟𝐵𝑡−1 )).
To proceed from theory to empirical testing, we take first difference of equation (4) toobtain1

1(8)∆𝐵𝑡 = ∑∞
𝑗=0 (1+𝑟)𝑗+1 ∆𝑆𝑡+𝑗+1 + lim (1+𝑟)𝑗+1 ∆𝐵𝑡+𝑗+1 .
𝑗→∞Given ∆𝐵𝑡 = 𝐵𝑡 − 𝐵𝑡−1, and using equation (1), we can rewrite equation (8) as follows.

1

1

𝐺𝑡 + 𝑟𝐵𝑡−1 − 𝑅𝑡 = ∑∞𝑗=0 (1+𝑟)𝑗+1 ∆𝑆𝑡+𝑗+1 + lim (1+𝑟)𝑗+1 ∆𝐵𝑡+𝑗+1 .
𝑗→∞

(9)

Given the NPG condition, this equation can be written as shown in Equation (10).

1

(10)

𝐺𝑡 + 𝑟𝐵𝑡−1 − 𝑅𝑡 = ∑∞𝑗=0 (1+𝑟)𝑗+1 ∆𝑆𝑡+𝑗+1

To test whether or not equation (10) holds, we test the stationarity of (𝐺𝑡 + 𝑟𝐵𝑡−1 −𝑅𝑡 ) by imposing 𝑅𝑡 , 𝐺𝑡 , and 𝐵𝑡−1 are cointegrated vector (1, -1, -r) (or the primary
surplus and debt are cointegrated with a cointegrating vector (1, -r)). If we can confirm

7stationarity among these variables, we can consider the budget deficit or debt assustainable.3
Many papers published during the decade from the mid-1980s to the mid-1990s such
as Trehan and Walsh (1988), Hakkio and Rush (1991), and Quintos (1995) employ thisby conducting the unit root or cointegration test for fiscal data.4
Incidentally, a default may not be plausible if the government is running a budget
surplus despite subsequent accumulation of government debt. The ad hoc approachcannot capture this. Bohn (2008) introduces the “model-based sustainability approach”
to estimate the reaction function developed by him in 1998.5 Bohn (1998) estimates theequation below.

(11)𝑠𝑡 = 𝜌𝑑𝑡∗ + 𝜇𝑡 + 𝜀𝑡 ,where 𝑠𝑡 is the ratio of primary surplus to GDP, 𝑑𝑡∗ is the ratio of initial debt
outstanding to GDP, 𝜇𝑡 is other determinants of the primary surplus, and 𝜀𝑡 isdisturbance. If 𝜌 is estimated to be positive and statistically significant, we estimatethat the budget deficit is sustainable because the government can generate a budget
surplus to repay the initial debt. 𝑑𝑡∗ is replaced by the privately held debt-to-GDP ratioat the start of the year in the original econometric analysis by Bohn (1998).

3

Please note that there are other researches such as those by Hamilton and Flavin (1986), which
estimates the No-Ponzi Game conditions directly and whether or not statistically significant. However,following the classification of Bohn (2008), here we concentrate on studies using the unit-root or
cointegration approach.
4 Some previous works also confirm the stationarity of a deficit because it is conceptually the same as
the cointegration of its components, as mentioned in Bohn (2008).
5 In terms of terminology, “reaction function approach” may be rather appropriate. However, wefollow the term using Bohn (2008) to make a comparison with the ad hoc approach.

8How can we rate the Japanese government based on these approaches? Earlier studies(Fukuda and Teruyama, 1994; Doi and Nakazato, 1998) present an optimistic picture.
Fukuda and Teruyama (1994) employ the cointegration method as well as the Hamilton
and Flavin’s (1986) approach, and this research can be a leading paper using the ad hoc
approach among the earlier Japanese studies. These researchers examine using data at
the central government level for the period from 1965 to 1992—a period of rapid
economic growth and before the onset of the prolonged recession (“the lost decade”).
They find that the Japanese government debt is sustainable using Perron’s (1989)
unit-root test with a structural break on the residual of the logarithm of government
revenues minus the logarithm of the total government expenditures (log 𝑅 − log 𝐺). Doi
and Nakazato (1998) employ Bohn’s (1998) approach, noting a high degree of financial
integration between the central and local governments and argue that a consolidated
budget deficit is a more appropriate unit of analysis. They examine combined data at
the central-local government level for the period from 1955 to 1995 and find that thesustainability conclusion is robust to the consolidation of accounts. One contributory
factor behind the findings is the tax reforms of 1989 that introduced a value-added tax.
Another factor is an institutional restriction until 1975 that prevented the central
government from issuing bonds, with a few exceptions, during much of the sample
period.
Recent studies, in contrast, are more pessimistic. For an ad hoc approach, Ono (2008)
examines sustainability for the G-7 countries using quarterly data from 1995 through2001. He employs Sollis’s (2004) unit-root test with smooth transition, finding Japan tobe the only country where fiscal sustainability does not hold. Doi et al. (2011) employ

9the model-based approach on updated data from 1980 through 2010, and conclude that
the Japanese government debt poses serious challenges.6
Why is this change in results? One relevant indicator that possibly explains this isJapan’s social security expenditure increase due to a rapidly aging population. As
shown in Figure 3, expenditure related to social security has been continuously
increasing, amounting to nearly 32 trillion yen (approximately USD 300 billion) in FY
2016, or almost double the figure in the late 1990s. Social security expenditure
undoubtedly has been a burden on Japan’s government budget.

Figure 3. Movement of social security related expenditure in the central government
budgetTrillion JPY
35
30
25
20
15
10
5

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

0

Source: Website of Ministry of Finance, Japan

6 For a paper using another approach, Ihori et al. (2003) employ Hamilton and Flavin’s (1986)

approach, examining quarterly data from 1957 through 1999, and conclude it is unsustainable.

102.2. The “deficit gamble” and prediction of future government surplus
Incidentally, a record of the past fiscal policy does not provide information about the
government’s future budgeting path. Therefore, it is necessary to conduct a simulation
for future government debt or deficit under the framework assumed in economic growth.
Two approaches that complement the time series analysis we have seen so far are
considered: examination of the possibility of a “deficit gamble,” and forecasting thebudget surplus to restore sustainability into the future.
First, we explain a simple framework for “deficit gamble.” Here we rewrite Equation(1) as follows.

(11)

𝐵𝑡 = (1 + 𝑟𝑡 )𝐵𝑡−1 − (𝑅𝑡 −𝐺𝑡 ).

By assuming that the primary budget’s balance (𝑅𝑡 −𝐺𝑡 ) is equal to zero, we rewrite
Equation (11) in per GDP terms:

1+𝑟

(12)

𝑡
𝑏𝑡 = (1+𝑦̂)𝑏𝑡−1 ,

where 𝑏𝑡 is the debt-to-GDP ratio and 𝑦̂ is the GDP growth rate. Equation (12) implies
1+𝑟𝑡that the debt-to-GDP ratio grows by (1+𝑦̂). Please note that1+𝑟𝑡
= 1 + 𝑟 − 𝑦̂𝑡 . If the(1+𝑦̂)

economy grows sufficiently faster than the interest rate of government bonds, this may
reduce the debt-to-GDP, even if the government generates budget deficits.
1+𝑟𝑡Ball et al. (1998) make a projection of (1+𝑦̂)
into the future by modeling this as astochastic process in the US to examine the likelihood of a successful “deficit gamble.”11

Oguro (2009) reexamines Ball et al.’s (1998) analysis for France, Germany, Italy, Japan,
the US, and the UK. Oguro (2009) shows that while five countries, other than Germany,
historically satisfy the condition “𝑦̂𝑡 > 𝑟” on average, this is not the case for all countries
if he conducts the recalculation by adding the standard deviation on uncertainty. He
also points out that Japan is the worst among the six countries in terms of thelikelihood of failure in the “deficit gamble,” which means the debt-to-GDP ratio exceeds
a certain level.
The other framework is to predict the level of budget surplus to make the government
budget sustainable using certain micro-foundation macroeconomic models.
First, Hosono and Sakuragawa (2011) examine using the dynamic stochastic generalequilibrium (DSGE) model, which shows that the current primary deficit turns to asurplus in 10 years and increases up to 2.2% surplus of GDP so that the government
debt-to-GDP ratio becomes sustainable. Second, Arai and Nakazawa (2014) apply
Chalk’s (2000) overlapping generations (OLG) model. They calculate the level ofprimary balance ratio to GDP that converges the government debt-to-GDP ratio intosome finite level under a certain assumption of economic growth. They show that the
government should maintain the primary surplus at 13.8-18.7 % of GDP to make thegovernment budget sustainable, but the primary deficit-to-GDP ratio reaches nearly
8 % in effect. Finally, Arai and Ueda (2013) predict the size of economic growth to keep
the government budget sustainable by applying Chalk’s (2000) model. They show thatthe primary deficit may be unsustainable unless the economic growth rate is more than
5 %, an unrealistic figure in contrast to Japan’s growth rate in these two decades,
according to their setting.

122.3. Forecasting the fiscal burden to keep government budget sustainable
Whereas studies presented in Section 2.2 calculate the size of the budget surplus torestore sustainability in the government budget, they do not clarify how nations shouldbear the burden. In Section 2.3, we introduce some researches that examine this.
A Blanchard-type (1990) simulation is the simplest model to predict the size of fiscal
burden for keeping government debt and deficit sustainable. In this model, the analyst
assumes (1) the growth rate of an economy (g) and interest rates (r), (2) a government
expenditure stream based on population projections, and (3) an initial debt level tomake a projection. The advantage of this approach is that an analyst can identify acountry’s level of fiscal burden necessary to make the government budget deficit
sustainable. Here, the level of “sustainable” government debt is defined as one thatstabilizes the debt-to-GDP ratio at the level in the base year (or initial year), whichreflects the sustainability defined earlier.
Broda and Weinstain (2004), Doi (2006), and Doi et al. (2011) employ this type ofsimulation. In a revisionist study, Broda and Weinstain (2004) argue that while thegross debt of the Japanese government stands apart from other OECD countries, thenet debt does not look alarming. To sustain the fiscal policy, as in a private sector firm,
they argue that one should consider both sides of the balance sheet in solvency analysis
and examine the behavior of net debt. They conclude that government receipts (taxrevenue and social security contributions) to GDP ratio needs to increase to 35 percent
from 32.2 %, the average between 1980 and 2000. Doi (2006) argues against thedefinition of net debt employed in Broda and Weinstain (2004), noting that some of theasset items such as social security funds cannot be liquidated and should be excluded

13

from the analysis. Doi (2006) demonstrates that the tax-to-GDP ratio needs to increase
more than the level predicted by Broda and Weinstain (2004), to an additional
one-percentage point (36%).
In contrast to these earlier studies, latter studies paint a dismal picture. Doi et al.
(2011) recalculate the Broda and Weinstain (2004)-type simulation until 2100 by setting
2010 as the base year, concluding that the tax-to-GDP ratio should rise to 40-47 % tostabilize the debt-to-GDP ratio.
One limitation with the Blanchard-type simulation is the need to impose assumptions
on a number of variables such as the growth rate of an economy. In principle, thesensitivity of predictions to such assumptions can be validated as they can sometimes
make the conclusion drawn from the analysis doubtful. An alternative framework is tomodel an economy to endogenize important variables, using some micro-foundation
macroeconomic models.
Here we introduce two research studies. First, Ihori et al. (2006) employed amulti-period OLG simulation model developed by Auerbach and Kotlikoff (1987). They
modified the Auerbach and Kotlikoff (1987) model by incorporating taxes, a public
pension scheme, and a public health insurance scheme. They assumed that the
government will decrease the debt outstanding until 2023 and the debt outstanding
ratio to GDP will be constant from 2024, functioning as a commitment device to rule out
the violation of fiscal solvency in their analysis. They clarify that the tax and social
security burden to GDP will increase up to 60% ( benchmark calculation) in 2050 under
the aforementioned fiscal rule. Furthermore, if the tax and social security burden tonational income, which is employed in the official document of the Ministry of Finance,
is used as an indicator of the burden, it amounts to about 80%. Second, Hansen and14

Imrohoroglu (2016) implemented a simulation until 2010 based on a simple dynamic
general equilibrium (DGE) model and conclude that consumption or labor income tax
rate (the ratio of government purchases and transfer payments to output) should be
40-60% to restore sustainability in government debt, which the government obeys as its
intertemporal budget constraint.
The simulation based on some theoretical models also implies that future generationsin Japan will bear the burden of fiscal debt as compared to the past generation in orderto maintain the sustainability of government deficit.

3. Tipping point of a fiscal “crisis”
Studies introduced in Section 2 do not use the open economy model and exclude theeffects of foreign factors.
Recent research by Hoshi and Ito (2012) shows that with no government action, debt
will likely exceed the amount of private sector financial assets in the near future even if
Japan’s current public financial condition is not on the verge of a crisis. They suggestthat the new JGBs would not be sold at low interest rates; instead, the interest rate of
JGBs would rise. Hoshi and Ito (2014) define this as a “crisis,” and propose a gradualincrease in tax rates to avert the “crisis.”
The findings of Hoshi and Ito (2012) are summarized as follows. First, the sovereign
debt crisis that happened in Greece and Spain is presently not applicable to Japan.
Japan’s abundant household assets, which contribute to the low and stable JGB yields,
have for long financed Japan’s debt. Second, Hoshi and Ito (2012) argue that if private
savings decline and government debt continues to increase, debt will reach the level of15

private sector savings. They predict that although the results are different anddependent on the scenario, the amount of JGB will exceed the private sector’s financial
assets in the years between 2020 and 2024. As a result, since the share of foreign
investors increases, interest rate will rise as shown in Tokuoka’s (2010) study, which
attributed the cause of the low-interest rate to a home bias of the Japanese investors.7
However, note that although Hoshi and Ito (2012) posit this following the results by
Tokuoka (2010), they did not predict how the increase in the share of foreign investors
for the JGB affects its yields.

4. Coordination problem in the JGB market
The Japanese government had exerted direct control over the allocation of JGBs. Until
1964, no government bonds were issued, in line with recommendations of the Dodge line.
As early as 1953, public corporations issued bonds at artificially low rates. The bondmarket did not clear because the government organized a syndicate of banks, whichpurchased public corporation bonds. The Bank of Japan repurchased the bonds after
one year. However, the government gradually lost its influence though the 1980s andthe syndicate was formally abolished in 2006. The Trust Fund Bureau (TFB) played an
important role in alleviating the coordination problem in recent years.8
However, in 1998, the Japanese Finance Minister announced that the TFB funding
would not be used to buy JGBs (78% reduction from previous year). Onji et al. (2012)7

Moreover, Matsuoka and Terada (2012) also predict the size of interest rate accompanying theincrease in the share of foreign investors. They show that according to OECD data, when private
saving minus debt is 1.05GDP, bond yields tend to go up more rapidly with additional debt. They
predict that JGB yield will be 10% in 2018-28, while the current JGB yield is around 0.5%.
8 The TFB collected funds from public pensions and postal saving. The Ministry of Finance (MOF)
used these funds to purchase JGBs, and this gave rise to low JGB yield.

16

document this TFB shock, and show that it accounted for a 0.50 percentage point
increase in JGB yields. They also point out that the total withdrawal of postal saving
fund is estimated to lead to a 0.32 percentage point increase. The announced change inthe financial policy affected the risk premium of buyers.
There is no doubt that the block public holding historically mitigates a potential
coordination problem among investors, as shown by Morris and Shin (2014), andthereby reduces risk premiums. However, Onji et al. (2012) are concerned that even if
low JGB yields can be attained with public financial institutions such as postal saving
and public pensions holding a certain fraction of marketable JGBs, the JGB market
may become volatile once the government withdraws from the JGB purchase.

5. Conclusion and discussion
Reflecting the unprecedented debt accumulation over the past two decades, many
researchers are concerned about the sustainability of government deficit and thepossibility of a sovereign debt crisis developing in Japan. This paper reviews the related
studies through a threefold approach: sustainability problem, relations with foreign
investors, and coordination problem in the JGB market.
Researchers concerned with sustainability unanimously agree that the Japanese
government will have to generate sufficient fiscal surplus for achieving sustainability.
Moreover, when the share of foreign investors increases, as indicated by Tokuoka (2010)
and Hoshi and Ito (2012), the surge in JGB bond yields is apprehended, and it may
induce the crowding-out of private capital formation or reduce non-interest spending
owing to the increase in interest rate payment. In addition, following the results of Onji17

et al. (2012), the JGB market may become volatile once government financial
institutions quit their role of primary purchasers of JGBs. This could also prove
detrimental to the macro economy as well as the government budget.
However, there is yet some scope for researchers to examine the underlying fiscal
problems in Japan. First, there have been many studies focusing on the general
government, but very few examine the relationship with monetary policy. Among thestudies introduced in our paper, Doi et al. (2011) examine the influence of monetary
policy by emphasizing arguments related to the fiscal theory of price level (FTPL).9 In
light of the Bank of Japan’s move of bulk buying of JGBs after 2012, researchers should
pay more attention to the interaction between monetary and fiscal policy. Second, very
few predictions have been made by employing theoretical models on the relationshipbetween home bias and JGB holdings. Hoshi and Ito’s (2012) analysis is not based on
the micro foundation macroeconomic model, and it does not capture the behavior of eacheconomic agent accurately. As reviewed by Coeurdacier and Rey (2012), sometheoretical frameworks explain home bias in the international financial market. A
rapidly aging population will undoubtedly reduce private sector savings, and this may
increase foreign investors’ share in JGBs. Researchers are urged to examine and makean inference on how this affects the JGB market using some micro foundation
macroeconomic models.

Matsuoka (2015) examines the “fiscal limit” —the point beyond which taxes and government
expenditures can no longer adjust to stabilize the value of government debt—in the Japanese economy.
However, since Matsuoka (2015) does not model the monetary policy authority, his framework does notnecessarily deal with the interaction between monetary and fiscal policy in the context of FTPL.
918

Acknowledgement
The authors would like to thank Seo-Young Cho, Shigeyuki Hamori, Bernd Hayo,
Kentaro Iwatsubo, Yuji Kawano, Akihiro Kawase, Shigeto Kitano, Eiichi Miyagawa,
Katsuyoshi Nakazawa, Yoshiki Ogawa, Masayuki Tamaoka, Hajime Yamada, Setsuo
Yamaki, and participants of the workshop held in Kobe University and Toyo University.
The Japan Society for the Promotion of Science (Grant-in-Aid for Scientific Research #16H03637 &#17K03764) has supported this work financially. The usual disclaimer applies.

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