Why Do Interest Rates Remain Low Despite the Accumulation of Government Debt in Japan?

Kenji Tanaka
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Kenji Tanaka: Professor, Faculty of Economics, Teikyo University

Public Policy Review, 2021, vol. 17, issue 2, 1-33

Abstract: This paper conducts a quantitative analysis of the determinant factors of the nominal long-term interest rate based on panel data concerning 25 developed countries in the period from 1990 to 2019. While the main factors of the decline in long-term interest rates around the world since the 1990s are falls in the potential growth rate and the expected inflation rate that have been observed in many developed countries, there are also various other interconnected factors. In Japan, as government debts continue to grow, there is upward pressure on interest rates. However, the upward pressure on interest rates has been curbed by unconventional monetary policy. Since the beginning of the 2000s, the nominal long-term interest rate has fallen below the nominal growth rate in many countries. The factors affecting this trend include investors’ preference for safety, unconventional monetary policy, and the sovereign spillover effect. While investors’ preference for safety, which is due to a decline in expectations for future growth, is unlikely to change much in the short term, the downward pressure on interest rates due to unconventional monetary policy could change if the monetary policy changes. The sovereign spillover effect could also exert upward pressure on interest rates in Japan, depending on interest rate movements abroad. Therefore, the situation of the nominal growth rate being higher than the nominal long-term interest rate is not a permanent phenomenon.

Keywords: long-term interest rates; potential growth rate; fiscal problems; unconventional monetary policy; sovereign spillover (search for similar items in EconPapers)
JEL-codes: E43 E52 H63 (search for similar items in EconPapers)
Date: 2021
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