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

Yili Chien, Wenxin Du and Hanno Lustig

Journal of Economic Perspectives, 2025, vol. 39, issue 4, 3-26

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 United States faces similar fiscal pressures, it is unlikely to adopt Japan's approach.

JEL-codes: E23 E43 E62 G23 H62 H63 J11 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/jep.20251452

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