Japan’s Debt Puzzle: Sovereign Wealth Fund from Borrowed Money

YiLi Chien, Wenxin Du and Hanno Lustig

No 2025-023, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We analyze the risks associated with Japan’s prolonged low-interest rate policies amid a global environment of rising rates. To finance its persistent deficits, the Japanese public sector depends on inexpensive domestic funding to invest in risky assets both domestically and internationally, effectively creating a sovereign wealth fund fueled by borrowed money. Ultimately, these risks fall on Japanese bondholders, depositors, and taxpayers. While the U.S. faces similar fiscal pressures, it is unlikely to adopt Japan’s approach.

Keywords: Japan; government debt; unconventional monetary policy; sovereign wealth fund (search for similar items in EconPapers)
JEL-codes: E62 G12 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2025-09-21
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DOI: 10.20955/wp.2025.023

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