Saving-Investment Balance and Fiscal Sustainability of Japan: A View from the JGB Market

Abstract

This paper provides an overview of the sustainability of Japan’s government debt, emphasizing the viewpoint of market participants in the Japanese government bonds (JGB) market. The Japanese government will be able to finance its debt as long as current surpluses continue, meaning there is sufficient domestic demand for JGB. Looking at domestic investors’ portfolio choices, both life insurance companies and pension funds are increasing their holdings of long-term government bonds to match the maturities of their assets and their payments to households. Japanese banks, on the other hand, are increasing their holdings of short-term government debt, almost proportionally to the increase in their deposits. However, there is substantial heterogeneity in portfolio choice. Three megabank groups (Mitsubishi-Tokyo-UFJ, Mizuho, Sumitomo-Mitsui) and large regional banks have decreased their portfolio weights of JGB recently. Smaller banks specializing in small-firm lending and agricultural lending as well as Japan Post Bank (Yu-cho) have increased the proportion of government debt in their portfolios. Hence, potential losses in their portfolios, once the JGB yield starts to increase, are much higher with the latter group of financial institutions.