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This is so common that it already has a name: extend and pretend. That's exactly what was done with Greece; the interest rate was lowered to a scandalously gen

This is so common that it already has a name: extend and pretend. That's exactly what was done with Greece; the interest rate was lowered to a scandalously generous level, maturities extended to practically forever (Merkel and co. will be long dead by the time most of it is due), and everyone got to pretend things were fine. As usual with this approach, things weren't fine, and when it was time to extend and pretend again, someone decided they weren't going along with it. Japan has been extending and pretending for about 25 years now. They are far more indebted than Greece but their interest rates are even lower. There is no conceivable way that Japan is ever going to repay that debt, and it's still growing at a pretty rapid pace. The circumstances are different (very few JGBs are held by foreigners, and Japan issues its own currency), but it's pretty clear from experience that extend and pretend leads to lengthy periods of anemic economic activity. The question is whether default and workout will be any better; the record there is mixed at best.

jbapple 11y ago
If Japan owes debt in its own currency, can it just print money to pay off the debt? If Greece can't devalue its currency this way, is its situation materially different by even just this fact alone?
- cperciva 11y ago
  If Japan owes debt in its own currency, can it just print money to pay off the debt? That's effectively what Japan is doing, by having its central bank loan money at 0.1%.
  - jbapple 11y ago
    >That's effectively what Japan is doing, by having its central bank loan money at 0.1%. Does that make it more conceivable that Japan will eventually pay down its debt?
    - cperciva 11y ago
      Yes. Economists often refer to "explicit" sovereign defaults (where the debts don't get paid back) and "implicit" defaults (where the debts get wiped out by a policy of deliberate inflation or devaluing of the currency). Greece's inability to effect an implicit default is why they've ended up with an explicit default. In the case of Japan, since most of their debt is held by residents, it's even a stretch to call this an implicit default; a better characterization would be "wealth tax effected by inflation". Either way, if the Japanese government could maintain a balanced budget, their central bank policy of flooding the market with Yen would eventually allow them to pay off the existing debts.
      - ucho 11y ago
        Japan is now in a trap - they want to go from deflation to moderate inflation to boost economic growth but won't be able to handle the dept if cost of borrowing money raises. Also their demographics situation is one of the worst in the world - if they don't repay the debts now how will they do it when number of people in production age drops.

jbapple 11y ago

If Japan owes debt in its own currency, can it just print money to pay off the debt? If Greece can't devalue its currency this way, is its situation materially different by even just this fact alone?

cperciva 11y ago
If Japan owes debt in its own currency, can it just print money to pay off the debt? That's effectively what Japan is doing, by having its central bank loan money at 0.1%.
- jbapple 11y ago
  >That's effectively what Japan is doing, by having its central bank loan money at 0.1%. Does that make it more conceivable that Japan will eventually pay down its debt?
  - cperciva 11y ago
    Yes. Economists often refer to "explicit" sovereign defaults (where the debts don't get paid back) and "implicit" defaults (where the debts get wiped out by a policy of deliberate inflation or devaluing of the currency). Greece's inability to effect an implicit default is why they've ended up with an explicit default. In the case of Japan, since most of their debt is held by residents, it's even a stretch to call this an implicit default; a better characterization would be "wealth tax effected by inflation". Either way, if the Japanese government could maintain a balanced budget, their central bank policy of flooding the market with Yen would eventually allow them to pay off the existing debts.
    - ucho 11y ago
      Japan is now in a trap - they want to go from deflation to moderate inflation to boost economic growth but won't be able to handle the dept if cost of borrowing money raises. Also their demographics situation is one of the worst in the world - if they don't repay the debts now how will they do it when number of people in production age drops.