Japan's high debt is stable, but only if the central bank keeps buying bonds

A new economic model explains how Japan has kept its massive government debt stable for over a decade. It turns out this stability depends on the central bank forcing banks to buy government bonds at low rates. This means the government can keep spending without triggering a debt crisis, as long as the financial system remains 'captive'.

For years, economists worried Japan's huge national debt would lead to disaster. This paper suggests that worry was misplaced, at least for now. It shows that Japan has found a way to manage its debt by making its own financial system absorb it. This allows the government to spend on things like infrastructure without having to raise taxes or cut services, but it also means the central bank has to keep interest rates low and buy up bonds, which can distort the market.