6.1 Fisher Effect Flashcards
What is the Fisher Effect formula?
i = r + π
i = nominal rate of interest
r = real interest rate (usually unobservable)
π = inflation rate (pi)
6.3 Japan’s Love of Debt Offers View of U.S. Future
Japan is grappling with a high government debt, primarily owned by its central bank and denominated in yen, which reduces default risks. Economists advocate for a significant annual spending increase of about 30 trillion yen ($270 billion) to spur growth, as both companies and consumers are reluctant to spend. The Bank of Japan’s bond-buying program allows interest payments to return to the government, making the debt more manageable. While there are concerns about inflation and potential fiscal crises if interest rates rise, many believe Japan’s debt situation is sustainable and crucial for economic recovery, especially as Prime Minister Suga faces pressure to implement a stimulus package amid declining approval ratings.
What are the arguments put forward by those supportive of Japan raising more debt to fund various domestic initiatives?
Government spending is needed to jumpstart the economy as consumers and businesses have excess savings
Why do some proponents of sovereign debt claim that Japan has “no fear of default”?
Japan’s government debt is issued in yen (its own currency).
About 50% of the outstanding Japanese debt is owned by the Japanese central bank
How and why has the Bank of Japan become such a large holder of Japanese government bonds?
Through an asset-purchase stimulus program known as quantitative easing (QE). The Bank of Japan buys newly issued Japanese government debt, injecting money (yen) into the economy. This results in an increase in the price of the bond and a decrease in the yield (interest rate) that the bond pays.
What is an argument against continuing to increase Japan’s debt burden?
If long-term interest rates move sharply higher, compared to other countries, Japan is likely to experience a fiscal crisis as the government does not collect enough taxes to service its debt burden (to pay the bonds’ interest expense)
