Simulation Analysis of Debt Management Policies to Ensure the Sustainability of Japan's Public Debt

Author Name DOI Takero  (Faculty Fellow, RIETI / Associate Professor, Faculty of Economics, Keio University)
Creation Date/NO. April 2006 06-J-032
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Amid increasing concern over the sustainability of Japan's public debt, Christian Broda and David E. Weinstein presented a paper (2005), arguing that Japan's public debt levels are sustainable. They make estimates based on simple accounting calculations of data from Japan's System of National Accounts (SNA) and state that net liabilities of the Japanese government are not so imminently large and Japan can achieve fiscal sustainability by securing a viable level of the government revenue-to-GDP ratio. However their simulation analysis includes overly optimistic scenarios. Therefore, by reconsidering the research of Broda and Weinstein, this paper seeks a more objective analysis of policy management needed to ensure the sustainability of Japan's public debt.

This study closely verifies the estimates of Broda and Weinstein and then conducts a wide range of simulation analysis with different scenarios. Also the definition of government debt is reconsidered. For instance, most of financial assets held by the Japanese central and local governments, which are not supposed to be allotted to debt redemption, should not be offset to acquire the net debt. In addition, the recent (FY2002-2005) deterioration of the fiscal balance is taken into consideration. The results of this analysis indicate that a higher government revenue-to-GDP ratio than Broda and Weinstein's estimates is required in order for Japan's public debt to be sustainable. Specifically, Japan would need to raise its government revenue-to-GDP ratio from the current level of 30% to approximately 36%, which suggests that both reduction of social benefits and a comparable tax increase are required to achieve fiscal sustainability.