japan-fiscal-crisis-warning-unlimited-debt-issuance-historical-lessons
- MMT holds that a sovereign borrowing in its own currency cannot be forced to default.
- Its supporters argue inflation, not debt stock, is the real constraint.
- Japan's public debt has long been the highest among major economies, well above twice GDP.
- History shows unlimited issuance tends to end in inflation or currency depreciation.
- Professor emeritus Akihiro Matoba examines the risks behind the MMT boom (paywalled).
When ten-year JGB yields touched roughly 2.8% in July while the yen sank to a four-decade low, the proposition that a sovereign issuer can borrow without limit stopped being an academic debate. This Toyo Keizai column by Kanagawa University professor emeritus Akihiro Matoba examines what waits at the end of the MMT boom. The full article is paywalled; what follows works from the published summary and documented history.
MMT holds that a country borrowing in its own currency cannot be forced into default — the binding constraint is inflation, not debt stock. Japan, with debt well above twice GDP and two decades of deflation rather than hyperinflation, is the case both sides cite.
But conceding that inflation is the constraint concedes that a constraint exists. Sovereigns historically resolve debt not by defaulting but by diluting: inflation and currency depreciation transfer the burden to holders of cash and bonds. Japan's own postwar settlement — rapid inflation, frozen deposits, a property levy — did exactly that without a formal default.
Two current signals matter. The BOJ, long the buyer of last resort, is stepping back, so yields must now clear in the market. And the yen weakened even as domestic rates rose, which points to doubts about fiscal sustainability rather than rate differentials.
For overseas readers: "Japan won't default" and "yen assets won't be hurt" are different claims. Watch BOJ taper execution, super-long auction bid-to-cover ratios, and debt service as a share of the budget.