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

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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.