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Home Publications Blogs Beat the Press If Japan Needs to Reduce Its Debt It Can Just Buy Back Bonds at a Discount When Interest Rates Rise

If Japan Needs to Reduce Its Debt It Can Just Buy Back Bonds at a Discount When Interest Rates Rise

Tuesday, 11 June 2013 04:18

In an article on the recent pick up of growth in Japan the Post told readers that Japan's government plans a sales tax increase next year:

"The tax increases are needed to cope with a growing public debt that already is more than twice the size of Japan’s economy."

In spite of having a very high debt-to-GDP ratio, Japan's interest payments are less than 1.0 percent of GDP. This is due to the fact that interest rates are extraordinarily low. If there is some importance to having a lower debt to GDP ratio, then Japan can simply repurchase long-term bonds at sharp discounts when interest rates rise, as is generally projected. That would be a costless way to reduce the debt to GDP ratio.

Comments (5)Add Comment
written by Last Mover, June 11, 2013 5:32
...a costless way...

When Dean Baker uses this term legitimately to demonstrate how incremental cost can be very low, he is accused of promoting a free lunch.

When the accusers studiously avoid using it as a legitimate explanation of how the ultra rich earn their income and wealth by getting a free lunch all the time, they get off scott free.
written by JSeydl, June 11, 2013 7:23
Last Mover: Life is based on free lunches. From day one, the wealth of the family each person is born into in large part determines his/her outcomes later in life.
I don't get the bond buy-back argument
written by Paul, June 11, 2013 1:12
How would the government finance the buy-back of the newly-cheap bonds? If they do it with new debt, then it doesn't help because the new debt, presumably, has the same newly-high interest rate as the debt they are buying back. So I guess you mean that they print money to buy back the debt, i.e. issue new bonds to the central bank rather than to the private bond market. But if you are allowing that they can print money to lower government debt then you need an analysis of the effect on inflation - which might be a good or a bad thing - such as that given by Simon Wren Lewis on helicopter money: http://mainlymacro.blogspot.co...s-and.html
You would then need to think about the effect of inflation on both real and nominal interest rates, as Paul Krugman did yesterday. I agree with you and with Krugman that the rise in interest rates is not a problem, but I don't think your argument is the right one.
Japan would borrow to retire debt
written by Dean, June 12, 2013 5:07

the point here is very simple. The price of long-term bonds falls when interest rates rise. Since Japan has issued huge amounts of debt at very low interest rates it will have the opportunity to buy it back at sharply lower cost. It can borrow to do this and have thereby sharply reduce its outstanding debt.

Suppose that the market value of debt with a face value of 1 trillion yen falls to 500 billion yen. Japan can borrow 500 billion yen to buy back and effectively eliminate 1 trillion in debt.

It's simple, fun, and easy. There's nothing tricky or difficult about this process. Private companies do it all the time. The surprising part is that the business press never discusses it in its whining about debt.
written by Alex Bollinger, June 12, 2013 6:16
@Paul: The idea is that if interest rates go up, then Japan can buy back the debt at a discount and reissue debt at a higher interest rate. That way the total interest Japan pays stays the same (so bond buyers are happy), but the principal, AKA debt-to-GDP ratio, decreases (which means growth... right?).

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.