NBER WORKING PAPER SERIES SUSTAINABILITY, DEBT MANAGEMENT, AND PUBLIC DEBT POLICY IN JAPAN. Takero Doi Toshihiro Ihori Kiyoshi Mitsui

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1 NBER WORKING PAPER SERIES SUSAINABILIY, DEB MANAGEMEN, AND PUBLIC DEB POLICY IN JAPAN akero Doi oshihiro Ihori Kiyoshi Misui Working Paper 357 hp:// NAIONAL BUREAU OF ECONOMIC RESEARCH 050 Massachuses Avenue Cambridge, MA 038 July 006 his paper is forhcoming in he book Fiscal Policy and Managemen in Eas Asia edied by akaoshi Io and Andrew Rose. An earlier version of he paper was presened a he 6 h Annual Eas Asian Seminar on Economics held on June 3-5, 005 and Conference on New Perspecive of Fiscal Susainabiliy, Goehe Universiy Frankfur Campus Wesend, Ocober 3 and 4, 005. he auhors hank Professors Dane Calas, akaoshi Io, Anne O. Krueger, Eli Remolona, Andrew Rose, and Jürgen von Hagen, as well as he paricipans for helpful suggesions. Any remaining errors are our own. he views expressed herein are hose of he auhor(s and do no necessarily reflec he views of he Naional Bureau of Economic Research. 006 by akero Doi, oshihiro Ihori and Kiyoshi Misui. All righs reserved. Shor secions of ex, no o exceed wo paragraphs, may be quoed wihou explici permission provided ha full credi, including noice, is given o he source.

2 Susainabiliy, Deb Managemen, and Public Deb Policy in Japan akero Doi, oshihiro Ihori and Kiyoshi Misui NBER Working Paper No. 357 July 006 JEL No. H63, H, E63 ABSRAC he purpose of his paper is o analyze susainabiliy issues of Japan s fiscal policy and hen o discuss he deb managemen policy using he heoreical models and numerical sudies. We also invesigae he desirable coordinaion of fiscal and moneary auhoriies oward fiscal reconsrucion. We include a poenial possibiliies of he governmen bonds in our heoreical model. he public bonds, herefore, canno be sold when he issuance leads he amoun of deb ousanding o be more han a cerain level. In his respec, he fiscal auhoriy has o ake ino accoun he upper limi of socks of public deb. his possibiliy of deb defaul provides he fiscal auhoriy o issue public bonds sraegically in an earlier period. A sraegic behavior of fiscal auhoriy induces he moneary auhoriy, in a laer period, o boos oupu and raise seigniorage revenues o eliminae he disorion of resource allocaion due o he limiaion on deb issuance. herefore, he moneary policy in a laer period suffers from an inflaion bias from he ax ane poin of view. here are wo ways o eliminae his disorion oward successful fiscal resoraion. One of hem is o make he moneary auhoriy more conservaive han sociey in he sense ha he price sabiliy weigh of moneary auhoriy is higher han ha of sociey. he oher way of eliminaing he disorion of he resource allocaion is o design an insiuional ceiling on he deb issuance. he direc ceiling can provide a binding consrain of he public bond issuance for he fiscal auhoriy of Japan because i has accumulaed he deb ousanding much more han oher counries. akero Doi Faculy of Economics Keio Universiy Mia Minao-ku okyo JAPAN doi@econ.keio.ac.jp Kiyoshi Misui Faculy of Economics Gakushuin Universiy -5- Mejiro oshima-ku okyo JAPAN kiyoshi.misui@gakushin.ac.jp oshihiro Ihori Deparmen of Economics Universiy of okyo 7-3- Hongo Bunkyo-ku okyo JAPAN ihori@e.u-okyo.ac.jp

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29 b s= 0 ( ρ s b s 8*!!!! V FN * N F N [ K~ b ] E.-F 07 N *!*"! ; * "!E N F! " *!""! 3 * " Eb, F! *;!*"!!! Wτ g b, X 9! "? " E.F Wπ X 9!!" E.F 0!"3 $! 3 *. "Eb, F! 9! N*!! V a = [α πaπ (x ~ x α gs (g g ~ ] β S V an E.6F arfmv an *!!! V FN! E.-FV MN " " E.F E@F 9 E.6F! * " "!! ; *$!!!Wπ X "! v( ~ x x = α πm π E./.F! 9!!! v( ~ x x = α gs ( g ~ g = β * N [ K ~ b ] E./.F $ "* E./. F * " =

30 ! ; e!! *E π = π F b, = δ [ K ~ b β * N { K ~ s= τ ~ x v = Nv [ K~ b b, ] = π = g ~ g = b s= 0 ( s ρ bs, ] Nv δ β * N [ K ~ b ρ { K~ (ρ 3 b 03 (ρ b 3 }] δ Nα β * N [ K ~ b πm ρ { K~ (ρ 3 b 03 (ρ b 3 }] E.F 0 δ Nα β * N [ K ~ b gs ρ { K~ (ρ 3 b 03 (ρ b 3 }] ( ρ s b s, δ *!!! V FN * N F N [ K~ b b, ] * β N F S N ( K~ b = N F * N δ {(β N * β S }[ K ~ b ρ β S (ρ N *!" F /N ρ { K~ s= 0 ( ρ s b s, }] E.@F 0!!3 ;! 3 * "Eb, RF! 9!!! K*!"!!!!! 4 * "!! * "! " E.F z 3 "!!!!!Wπ, τ, g X "! ; * vz( x ~ x = α gs ( g ~ g = α πm π E.=F *! "* EBF EF *" E.=F " ;! e! *E π = π F! D

31 π = x~ τ vz g ~ g = Hα πs [ K ~ = ( z ~ x vz Hv z [ K~ Hα gs [ K ~ ] ( ( vz z ~ x vz z ~ x ] ] E.DF 8*!!!! V FD * H F H [ K~ ( z ~ x ] E.F vz ; * N N V ac = [α πaπ (x x ~ α gs (g g ~ ] β S V ad E.F a R F M 9 E.F! *" "!! ; *, 0 0 Wπ X E./.F! 9!!! *! v( x ~ x = α gs ( g ~ g E./.BF!" *!!! V FC * N F N [ K~ b ] * β H F S H [ K~ ( z ~ x ] E.F vz %0 07!3 * N "!! 3 *. "Eb, RF! 9!!!!*! N**"!!! N *!! V a = [α πaπ (x ~ x α gs (g g ~ an ] β S V = 0 E.-F arfm *" E.F z b -

32 9 E.-F! * " "!! ; *$!!!Wπ X "! vz( ~ x x = α πm π E.6.F! 9! E.-F"?E.F!! vz( x ~ x = α gs ( g ~ g E.6.F $ "* EBF E.6. F *" E.F! ; e!! *E π = π F π = [ K ~ ( z ~ x ] Hα πs x~ τ vz g ~ g = = vz Hv z [ K~ Hα gs [ K ~ ( ( vz z ~ x vz z ~ x ] ] E./F!" *!!! V FD * H F H [ K~ ( z ~ x ] * vz β N F S N K~ E.F &4 5!!!! "!! Q *!!!!!V FD V FC *! N 5!V FD < V FC! *! N!! K ~ V Nxvz ~ D > K ~ V FD z VV FC!! b > ~ ~ β ( β D K E.@F S K S * *!!" * 4 5!"!!! 4! N -

33 !!!!*! *!*"! " "; * "! N!! V FN min{v FC, V FD }! * *! 8 * *" 4!9 V FN SV FC SV FD!! 0 < b N, < β S D K ~ {γ ( } E.=F ρ γ δ {(β N * β S }, b N, (γ b γ { s= γ b ( s= 0 b ~ ~ β ( β D K s ρ bs, K ~ b K ~ γ ( S K S ρ [b s= 0 0 ( ρ ( s b s ρ bs, } E.@BF β γ < S D ρ 5V FN < V FD < V FC! E.@F! 0 < b ~ s D βk ~ ( ρ bs, < K s= 0 γ ρ E.DF ~ D β S K γ < ~ K ρ 4V FN min{v FC, V FD } E.@BFE.=FE.@F E.DF *"*" N! N 5 *"" N! N s, ] -

34 -- % *!*"! ; * "! "L! " *!""! 3 * "! * ;! *"!!! Wτ g b s X 9! "? " E.F Wπ X 9!! " E.F!! N!; $ OOOO$ OOOO %0!"3 $! 3 * "! 9! N*!! V an = [α πaπ (x x ~ α gs (g g ~ ] β S V an E.6BF arfmv an *!!! $! E.F *!!!! " 0, * ( ( ~ = = = = s v v s s s s F FN b K N N V ρ ρ γ * * (,, } {( N S N β ρ γ ρ δ γ δ γ β γ β γ = E 9 F " = = = = = = 0, * 0,, ( ( ~ ( ~ s v v s s s s N s s s v v b K b K b ρ ρ β γ ρ ρ δ %0 ;! 3 * "

35 -6 "L!* "! " *!!!!!! * * 0, ( ~ ~ ( ~ = s s F F FD K N N vz x z K H H V ρ γ!! E.6. F <! *! U?E j F!! E./.F E./.BFE.DF*!!!! " *, ~ ( ~ vz x z K H H V F j S FD j β = = = 0, * ( ~ ( ~ j h v h v v h h S j s s j j j S F b K K N N ρ β ρ γ β 4! V FD minwv,j FD Z j X 8!V FN V FD! * *! 4 ; ""*, 66

36 $ Pr imar y Sur plus/gdp %, *" E!*F 3% % % % % % % % % 0% 0% 30% 40% 50% 60% 70% 80% 90% 00% Gover nmen Deb/GDP -/

37 $ %, *" E0*F Pr imar y Sur plus/gdp 4% 3% % % 0% -% -% -3% -4% -5% -6% % 0% 0% 30% 40% 50% 60% 70% 80% 90% 00% 0% 0% 30% Gover nmen Deb/GDP

38 00% $ -,!*A E5 A F 80% 60% 40% 0% 0% as of he end of fiscal year yr & less -5 yr s 6-0 yrs -9 yr s 0 yr s & m or e -@

39 A% $ 6 (!,A0 5 A ;*! -=

40 $ /! = If V FN > V FD V FD D C NC If V FN V FD V FN ND P P = V F b=0 ND V F ND P P 0! 0!!!%! * -D

41 A% $ (! ( 0 5 A ;*! 6

42 $ = C NC P D ND P P = C NC P P ND D P P D ND P P = D D P P P P P P 0! 0!!!%! * 6

43 " %! *A 0! " FY005 Iniial Budge (a FY006 Iniial Budge (b EA F (b (a 30-year Bonds,000.0, year Bonds 9, ,300.0, year Floaing-rae Bonds 9, , year Bonds, ,000.0, year Inflaion-Indexed Bonds,000.0, year Bonds 4, ,00.0,00.0 -year Bonds 0,400.0,600.0,00.0 reasury Bills 9,96.5 8,79.7,4.8 Aucion for Enhanced-liquidiy Suboal 9,76.5 3,59.7 3,758. Non-price Compeiive Aucion II,658.0,658.0 Amoun o he Marke 9,76.5 6,77.7 6,46. JGBs for Individual Invesors 3, , Amoun o Privae Secor (x 3, , ,6. Bank of Japan 3, , ,486. Fiscal Loan Fund,000.0,000.0 Fiscal Loan Bonds (ransiional measures 9, ,00.0 4,00.0 OC sales a Pos Offices, , Amoun o Public Secor (y 46, ,857.4,86. OAL (x(y 69, ,435. 4,070.0 $ "!!"." "=" $E//"! A! //"!$ <$="! F -!. "-" "!!$/ ""!$ 6G. 0 * G -H!,!$ #%A!$' 6

44 ",!A $ - C o m p o s i i o n r a i o M a u r i y Y e a r s O u s a n d i n g b a s i s % I s s u a n c e b a s i s % % % % 4. % % 6. 3 % % % % % %.0 0 % % 0.9 % % % % 4.8 % % % % % % % % % % % %.0 7 % 6-