"So this is Japan's
national problem. The country has a lot of debt, much of it issued by the
government. On the plus side, nominal interest rates are low, making the debt
easy to service (albeit that interest costs are a quarter of government spending,
see Andy Xie's analysis). On the negative side, those low interest rates
are a reflection of a deflationary, slow-growth environment that means its debt
isn't going to disappear.
Bring forward the cunning
plan. Generate inflation and consumers will start spending, business confidence
will improve and growth will resume. This will reduce the government's annual
deficit and reduce the real value of the debt over time. Problem solved. But
what about investors? Won't they demand a higher yield to compensate for the
inflation? Marty Feldstein reckons a four percentage point rise in borrowing
costs will push the annual deficit to 20% of GDP (admittedly, because of the
average maturity of the debt, that would take some time to occur)."
