Japan - Fiscal Sustainability - Defying Gravity

economist.com - by R.A. - August 14, 2012

ONE of this week's new NBER working papers is a fascinating look at Japanese government debt, by Takeo Hoshi and Takatoshi Ito.

"Economic research has been accumulating overwhelming evidence against the fiscal sustainability of Japan. Many international financial institutions, credit rating agencies, and private-sector analysts agree over this assessment. Yet, the JGB interest rate has been low and stable. The 10-year JGB rate has been below 2% since 1999, and between 0.8% and 1.5% in the last few years. The rate is much lower than the bond rate of other advanced countries. This is despite the fact that Japan has a higher debt to GDP ratio than the European countries that have suffered from sovereign debt crises in the last two years—Greece, Ireland, Portugal, Spain, and Italy. JGB yield actually fell as the Japanese debt to GDP ratio increased in the 1990s and 2000s as Figure 3 shows. Why has the JGB yield not risen?"

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DEFYING GRAVITY:
HOW LONG WILL JAPANESE GOVERNMENT BOND PRICES REMAIN HIGH? - (63 page .PDF file)
http://papers.nber.org/tmp/78579-w18287.pdf