Solving Japan’s financial problems…and creating some for New Zealand
Japan now has the industrial world’s heaviest debt burden at more than twice the size of its economy. Even at low current interest rates, debt-servicing costs account for roughly a quarter of the annual government budget. If interest rates were to rise by 2%, it would take more than 70% of total tax revenue just to pay the interest!
The Japanese government also needs to borrow more as it is currently running a substantial budget deficit, requiring an estimated 33.7 trillion yen of new bond issuance in 2018. This looks like an unrecoverable position. However, we have a solution. Mainly due to Japan’s quantitative easing program, the Bank of Japan currently holds over 41% of the Japan government's debt. What if it kept buying and took its ownership to 80% of its own debt, and then wrote it all off?
Source: Bloomberg, Bank of Japan
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