Chronic. After more than two decades of moderate deflation (prices fell by 0.5% on average per year), Japan, like all OECD countries, is experiencing the return of inflation, but at a significantly lower level (around 2%, compared to around 5.5% in France since April 2022). In the Japanese context, this is good news – for the macroeconomic balance, less so for individual consumers – since the 2% inflation target was at the heart of monetary policy objectives since the early 2000s.
But this return has consequences on the dynamics of public debt, which today represents more than 250% of gross domestic product in Japan, compared to around 110% in France and 66% in Germany. In this context, how should economic policies evolve? Should the Bank of Japan (BoJ) end its ultra-accommodative monetary policy? Should the Japanese government initiate a process of budgetary consolidation?
These questions were at the heart of a conference organized in Tokyo on Monday December 11 by the Canon Institute for Global Studies in collaboration with the Banque de France, “Inflation and public debt dynamics in a new environment: EU-Japan perspectives”during which Japanese and French economists, as well as economic policy makers, debated these questions.
A debt held for more than 90% by domestic players
Since the economic downturn of the early 1990s, Japan has accumulated public deficits, which have led to a record level of debt. But, unlike France, more than 90% of it is owned by domestic players. Today it is the BoJ which owns more than 50%, after a decade of very flexible monetary policy which saw the BoJ finance the issuance of this debt.
A problem therefore appears, well identified by the economics professor at Waseda University, Junko Koeda: the return of inflation will ultimately be accompanied by an increase in interest rates, which will lead to an increase in of the debt burden. The BoJ and the Japanese government thus have linked destinies. In particular, the BoJ has contributed to debt sustainability, while in theory its mandate is limited to price stability.
But the essential thing, as Takeo Hoshi of the University of Tokyo pointed out, is the relationship between interest rates r, for ” missed “which determines the cost of new debt issues, and growth rate g, for “growth” , which impacts tax revenues. When rg is negative, as has been the case in Japan for more than twenty years, there is no problem of debt sustainability.
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