Periodically the blogosphere, as well as some of the MSM and academia, raise the question of how Japan’s government is going to avoid insolvency. Federal debt exceeds 200% of GDP and continues to rise. Until now, the solution has been for interest rates to decline, thus allowing interest costs to stay relatively stable.
The bogeyman that is raised is that if interest rates rise, Japan will run into the Greek/Spanish problem that soon enough, interest payments will consume the bulk or entirety of the national budget, then the bond market will close and default will follow, perhaps associated with hyperinflation.
Of the alternative possibilities, I would like to focus on one. This is the possibility that interest costs decline from here, not rise, as interest rates decline fast enough to actually turn the selling of debt into a profitable exercise. For example, Japan could impose/develop an interest rate structure that, across the yield curve, is on average negative. The 10-year bond could yield nothing. Longer maturities could all yield less than 1%. The bulk of the debt issuance could be under 10 year’s duration and could all be negative.
Japan’s bond buyers have done well over the past 20 years. Not only have they preserved and gained purchasing power, and have owned a generally appreciating asset, but the yen has been a strong currency, with the advantages inherent therein.
Bears on Japanese govvies may overlook the coherence of national purpose in Japan. A national default would likely be considered shameful. Given low to no nominal GDP growth in Japan for many years, a declining population, and the national psyche as I understand it, I am loathe to think that this sort of end-game might not in fact come to pass.
If so: First Japan, then… where else?
