Silviase/jgov_v1.4_full_ann huggingface dataset:
## Figure 1-2-52 "By Industry" (iii) Shipbuilding i-Shipping

## "By Industry"

## Expansion of shipbuilding exports and regional revitalization through i-Shipping

○Promote “i-Shipping” where ICTs are incorporated in all phases from development, building to operation of ships to increase shipbuilding productivity by 50% and aim to realize energy conservation and zero malfunction.

○Increase Japan’s share in the world shipbuilding market from 20% to 30%, contributing to GDP expansion, regional economy, and employment.

Current status and issues of shipbuilding

Won the world's No. 1 share in 1956, the largest share won being 50%

But, Japan still has chances to win.

Japan's share is expanding again amid sluggishness of competitors.

Issue: while Japan leads in productivity, its cost advantage is weak.

Energy-saving performance where Japan had advantages was copied and the difference is narrowing.

## Promote productivity revolution by using advanced information technology in all of design, production, and operation phases

Figure 1-2-53 "By Industry" (iv) Logistics Industry

## "By Industry"

## Logistics productivity revolution worked on with all-out efforts of Japan

- Various inefficiencies occurred in Japan’s logistics in recent years, such as the truck-loading ratio that declined to 41%. It is necessary to improve productivity to overcome future labor shortages and contribute to economic growth.

- To this end, promote (i) growth accelerating logistics, such as truck business reforms with cooperation of shippers and early realization of automated aligned group run, and (ii) logistics that enhance living through package deliveries that are easy to receive. Targets are being examined with the idea of increasing labor productivity in logistics business by about 20%.

## Situations surrounding Japan’s logistics

Almost 2 hours of waiting occur per run

(Source: 2015 field survey by Japan Tracking Association)

■ At least 70% of road trucks cannot enter indoor parking lots of 3 m high ceiling
# Macroeconomic Implications of Low Japanese Government Bond Yields $ ^{♦} $

Masaya SAKURAGAWA $ ^{*} $ , Yukie SAKURAGAWA $ ^{**} $

## Abstract

One major puzzle of the Japanese economy at present is that low government bond yields coincide with a high level of government debt. This paper investigates the general equilibrium mechanism underlying this relationship and examines its macroeconomic implications. We argue that when investors fail to achieve international risk diversification in their asset portfolios because of home bias, they have no assets to hedge fiscal risk. The bond yield is then less sensitive to default risk, and the government can sustain a high level of debt. However, such sustainability is only possible at the expense of a reduction in the real interest rate, which weakens policy effects and ultimately leads to secular stagnation.

JEL Codes : E00, G12, H63

Keywords : Fiscal risk, Safe assets, Risk premium, Sustainability, Real interest rates
# 日本国債の低利回りに関するマクロ経済面における インプリケーション

櫻川 昌哉・櫻川 幸恵

〈要旨〉

政府債務残高の水準が極めて高いにもかかわらず、なぜ国債利回りが低いままなのかは、現在の日本経済における主要なパズルの一つである。本稿は、このパズルを明らかにする理論メカニズムを示し、そのマクロ経済へのインプリケーションを考察する。

分析のカギとなるのは、ホームバイアスが強く、投資家が資産ポートフォリオの国際的なリスク分散を達成できない場合、財政リスクをヘッジする代替的な資産を保有できないという視点である。なぜなら、財政破たんが起きると、国内のいかなる資産もその収益の減少を免れないからである。

この結果、国債の利回りは財政のデフォルトリスクに対して非感応的になり、政府は多額な債務発行が可能になる。しかしながら、こうした持続可能性は、実質金利の下落という犠牲によってのみ実現する。このことは日本経済を回復させようとする政策効果を弱めてしまい、結局のところ長期停滞をもたらすことになる。

JEL 分類コード : E00, G12, H63

キーワード：財政リスク、安全資産、リスクプレミアム、持続可能性、実質金利
### 1. Introduction

One major puzzle of the Japanese economy at present is that low government bond yields coincide with a high level of government debt $ ^{1} $ . From the perspective of conventional asset pricing theory, the bond yield should reflect the fiscal risk of large outstanding debt, currently more than 200 percent of GDP. Even more surprisingly, and as illustrated in Figure 1, among Organization for Economic Co-operation and Development (OECD) countries, the nominal bond yield in Japan is the lowest, but the debt-to-GDP ratio remains the highest. The Japanese government can sustain this high level of debt because of these low yields. However, this may have serious consequences for the Japanese macro economy. This paper aims to effectively understand the macroeconomic implications of the large stock of Japanese government bonds (JGBs) by investigating the general equilibrium mechanism underlying the low yields on JGBs.

There are three possible explanations concerning why the Japanese government can sustain a high level of debt at such low yields. The first is that there is substantial scope in the future for increasing the consumption tax rate and that domestic investors

Fig.1: The nominal bond yield and the government debt-to-GDP ratio (2001–2014)

(Data source : OECD and IMF)
trust government actions $ ^{2} $ . The second relates to monetary policy. Since 2001, the Bank of Japan (BoJ) has set the nominal interest rate close to zero $ ^{3} $ . In 2013, the BoJ commenced quantitative easing (QE) that involved large-scale purchases of long-term government bonds. It is widely believed that the recent decline in long-term government bond yields is attributed to that policy.

The third and final explanation is that the cumulative domestic savings surplus and the persistent strong home bias in the asset portfolios of domestic investors induce them to hold almost all JGBs on issue $ ^{4} $ . In support of this, Tomita (2001), Tokuoka (2010), and Ito (2011) emphasize the strong demand for JGBs by domestic financial institutions, which do not seem willing to diversify portfolio risk across international borders, but instead prefer yen-denominated assets. In Japan, domestic residents currently hold more than 95 percent of the JGBs on issue, a very high share compared with other advanced countries. However, the mechanism through which this home bias lowers the yields on JGBs is unclear. Indeed, while the large amount of domestic savings can lower the riskless component of these yields, any forces that reduce the risky component are not well known.

Hence, we construct a theoretical mechanism to explain why investors do not require a risk premium on government bonds under adverse fiscal conditions when there is a strong home bias. To understand the mechanism that links the home bias to the risk premium, we examine the features of JGB market. Table 1 details the portfolio characteristics of primary holders of JGBs in 2012. As shown, the largest bondholders are the central bank (the BoJ), private depository institutions, private insurance companies, public financial institutions, and social security funds, all of which are either owned or regulated by the Japanese government and considered to be “stable” holders $ ^{5,6} $ . Of particular note in terms of home bias is that these large bondholders
Table 1: Portfolio characteristics of the primary holders of government bonds

sector	market share of national debt	national debt/ financial assets	foreign assets/ financial assets
Central bank	11.6%	53.3%	2.4%
Private depository institutions	21.5%	11.6%	4.5%
Private insurance	16.4%	40.6%	15.8%
Public financial institutions	25.3%	31.0%	2.8%
Social security funds	8.7%	33.4%	16.9%
Private pension funds	3.5%	22.7%	20.1%
Households	3.0%	1.5%	0.5%
Overseas	4.4%	-	-
Others	5.6%	-	-

Program (FILP) bonds. Foreign assets comprise outward investment in securities.

Data source: National Accounts (Cabinet office).

hold small amounts of foreign assets in their portfolios.

Figure 2 depicts the nominal returns on 10-year government bonds for four countries, denominated in their own currencies. As shown, the returns on government bonds in the US, the UK, and Germany move similarly over the entire period, whereas the return on Japanese bonds is substantially and persistently lower. In line with uncovered interest rate parity, this is because domestic bondholders perceived a significant risk of an appreciation of the Japanese yen but of much larger magnitude than its actual movement. Hence, Japanese bondholders have overestimated the foreign exchange risk and, therefore, have failed to gain from the holding of a globally diversified portfolio of assets.

One reason for this is that safe assets are internationally limited; Gourinchas and Jeanne (2012) and Caballero and Farhi (2014) propose the notion of a shortage of safe assets, arguing that only some developed countries have the ability to supply safe assets. The number of safe assets available to Japanese investors is even more limited because of the flight to quality with the yen, given Japan's enormous holding of foreign assets, such that the yen tends to appreciate when adverse shocks hit the global economy. Remarkably, the Japanese yen appreciated substantially relative to both the US dollar and the euro for several years following the recent global financial crisis.
Fig.2: The nominal returns on 10-year government bonds: Four countries

(Data source: Bank of Japan, the FRB, Bank of England, and Deutsche Bundesbank)

The failure to achieve international risk diversification is key to understanding why Japanese investors have not looked for a higher risk premium on JGBs. If investors have easy access to foreign markets, they can hedge fiscal risk by holding foreign safe assets; otherwise, they would be obliged to hold only domestic assets. Unfortunately, domestic assets such as stocks and loans to domestic firms are also vulnerable to fiscal risk. Investors then face an “absence of safe assets” in the sense that they have no assets available for hedging fiscal risk. In this context, Sakuragawa and Sakuragawa (2016) construct a two-period model that explains low yields on government bonds under adverse fiscal conditions.

We extend the study by Sakuragawa and Sakuragawa (2016) to a dynamic framework and investigate fiscal sustainability and its macroeconomic implications. We construct a closed economy model of overlapping generations populated by two-period-lived agents. These agents hold two assets: government bonds and private capital. The central component of the model is that a fiscal crisis produces a negative externality on the return on capital. Agents have no access to any asset that hedges fiscal risk.
When there is an asset that hedges fiscal risk, the standard argument on asset pricing applies, namely, the yield on government bonds rises to reflect the default risk (e. g., Uribe, 2006). However, when there is no asset that hedges fiscal risk, the bond yield is not sensitive to the default risk. Intuitively, when fiscal default occurs, the return on government bonds declines as does the opportunity cost of holding the bonds. Given that bond yield does not sensitively react to default risk, the government can sustain a high level of debt under even quite serious fiscal conditions. This explains why Japan benefits from low government bond yields and why it has not experienced a fiscal crisis, despite its debt-to-GDP ratio being the highest in the OECD.

This model has several salient dynamic features. As debt increases, bond yield and the probability of default increase, reaching a debt limit (that is, the maximum sustainable debt), followed by default on the debt. The dynamic paths of debt and the bond yield differ depending on the presence of an asset to hedge fiscal risk. When capital is an alternative asset that hedges fiscal risk, the bond yield starts to rise at a low debt level, and the debt reaches the debt limit early. In contrast, when there is no asset for hedging fiscal risk, the bond yield rises only slowly, and it takes much more time to reach the debt limit. Fiscal default can then take place before any hike in bond yields.

This model also has several interesting macroeconomics implications. First, while the absence of safe assets allows the government to sustain a high level of debt, this sustainability arises only with the sacrifice of a reduction in the real interest rate. As long as the bond yield is insensitive to fiscal risk, the reduction in the real interest rate absorbs fiscal risk. The return on the stock market then negatively correlates with the level of outstanding debt.

Second, expansionary government expenditure financed by public debt can either stimulate or repress investment, but it increases the risk of default, followed by a reduction in the real interest rate. This contrasts with the results of IS-LM analysis in which the financing of government expenditure raises the real interest rate and crowds out capital investment.

Finally, reforms in financial markets and/or policies for enhancing growth positively affect investment, but worsen fiscal sustainability, and thus have an ambiguous effect on welfare. An increase in anxiety about fiscal balances can reduce the real interest rate, which in turn weakens the policy effects intended by the government and eventually leads to secular stagnation. The government should simultaneously
implement policies for enhancing economic growth and pursuing fiscal reforms.

This paper belongs to the literature that explains low real interest rates. Over the last two decades, we have witnessed the secular decline in real interest rates around the world. For instance, Caballero and Farhi (2014) use the notion of a shortage of safe assets backed by sound collateral to explain the low yields on US government bonds. In contrast, we treat government bonds as risky assets including default risk and explain the low yields on JGBs and the low real interest rates using the argument of the absence of safe assets. Barro (2006) explains low real interest rates by incorporating low-probability disasters in an asset pricing model, whereas Kitagawa (1994) explains the low real interest rate from the perspective of a world of risky capital. This argument for low real interest rates is along the lines suggested by the extensive discussions on secular stagnation (e.g., Kruguman, 2013, Summers, 2013).

Japan’s debt problem has been extensively studied from the perspective of fiscal sustainability. These studies include those by Doi and Ihori (2003), Dekle (2005), Broda and Weinstein (2005), Ihori et al. (2006), Sakuragawa and Hosono (2010, 2011), Doi, Hoshi, and Okimoto (2011), Hoshi and Ito (2013), Hansen and Imrohoroglu (2015), Matsuoka (2015), Miyazawa and Yamada (2015), and others. Many studies present a pessimistic scenario for fiscal sustainability in Japan. For example, Hansen and Imrohoroglu (2015) argue that to sustain its debt, the Japanese government must increase the consumption tax rate to 35 percent, a figure almost impossible to realize from a politico-economic perspective in Japan. In other study, Ghosh et al. (2013) compute the fiscal space, defined as the difference between projected debt limits and actual debt in advanced countries, and find that Japan has very little fiscal space.

Furthermore, a huge body of literature exists on sovereign default. Most of these studies examine the government’s strategic default in developing countries (e.g., Calvo, 1988, Cole and Kehoe, 2000, Arellano, 2008, and others). In contrast, we model fiscal default as an inability-to-pay problem which is triggered by a stochastic shock to the primary balance. We believe that inability to pay rather than strategic default is more likely to be relevant for analyzing public debt in countries where domestic residents hold almost all the debt (see Ghosh et al., 2013).

Our analysis also relates to several studies examining the overvaluation of asset prices or asset bubbles. Heterogeneous beliefs generated by overconfidence with short-sale constraints can account for bubbles in asset prices (e.g., Harrison and Kreps, 1978, Scheinkman and Xiong, 2003) $ ^{7} $ . Rational investors have an incentive to
exploit arbitrage opportunities when the asset is mispriced, thereby allowing for the overvaluation of prices relative to fundamentals to persist over several periods (De Long et al, 1990, Abreu and Brunnermeier, 2003). However, our finding contrasts with the findings of those studies in that we never attribute the seemingly overvalued bond price to heterogeneity in beliefs or short-sale constraints.

The remainder of the paper is organized as follows. Section 2 constructs our model, and Section 3 details its features. Section 4 provides some policy implications, and Section 5 discusses several related issues. Section 6 concludes the paper.

### 2. The Model

Consider an economy of overlapping generations populated by agents who are born and live for two periods. This economy is a closed economy in which agents do not have access to foreign markets. The young receive labor income W in the form of an endowment, pay tax at rate $ \tau_{t} $ , and save the remaining income by holding $ k_{t} $ units of capital and the one-period bond $ d_{t} $ with a price $ P_{t}(=1/(1+R_{t+1})) $ . The young's budget constraint is given by

$$ (1-\tau_{t})W=k_{t}+P_{t}d_{t}. $$

The old receive interest income and transfers, and consume.

The central component of the model is that the fiscal crisis produces a negative externality on the return on capital. The return on capital is $ 1+A $ in the nondefault state and falls to $ (1-\theta)(1+A) $ in the default state, with $ 0 \leq \theta \leq 1 $ . Cohen and Sachs (1986), Cole and Kehoe (2000), and Arellano (2008) model fiscal default costs as having negative implications for output $ ^{8} $ . We can think of $ \theta $ as a no-risk hedge measure because $ \theta $ captures the degree to which capital does not hedge fiscal risk.

The decline in output arises in several ways. As banks use government bonds as collateral for repo transactions among themselves, fiscal default leads to a shortage of