Budget Deficits, Government Debt and Interest Rates in Japan: An Analysis Using Published Budgetary Forecasts,” mimeo (Kwansei Gakuin

The association between budget deficits, government debt, and interest rates is analyzed using Japanese data. Estimating the reduced form for long-term interests derived from neo-classical frameworks, we find that a percentage point increase in the projected deficit-to-GDP raises the real 10-year and 5-year interest rates by 35 and 42 basis points, respectively. Similarly, a percentage point increase in the projected debt-to-GDP ratio is associated with an increase of four basis points and five basis points in the real 10-year and 5-year interest rates, respectively. This result, which is consistent with the often-cited benchmark of the “Parable of Debt Fairy ” in Ball and Mankiw (1995), implies that a percentage point increase in the debt-to-GDP ratio brings about, at most, a single-digit-basis-point rise in interest rates. In addition, the result that in the Japanese economy, budget deficits have larger effects than government debt is consistent with that of Feldstein (1986)