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Does Japan Vindicate Modern Monetary Theory?

For decades, the Japanese government has amassed more and more debt without triggering higher borrowing costs or inflation. But there is no such thing as a free lunch, and in Japan's case, it is future generations who will be left with the bill.

TOKYO – Public debt has soared since the 2008 financial crisis, and especially during the COVID-19 pandemic. According to the International Monetary Fund, the ratio of public debt to GDP in advanced economies increased from around 70% in 2007 to 124% in 2020. But the fear that rising public debt will fuel future financial crises has been subdued, partly because government bond yields have been so low for so long.

Although yields started falling much earlier, in the 1990s, they were kept low by quantitative easing (QE) after the 2008 and 2020 recessions. Few doubt that massive fiscal expenditures were warranted to alleviate suffering during those episodes. But advocates of Modern Monetary Theory take this logic a few steps further.

Advocates of MMT contend that as long as debt is denominated in a country’s own currency, there is no reason to fear a fiscal crisis, because a default cannot happen. Any withdrawal of fiscal stimulus therefore should be gradual. And in the meantime, new issues of public debt can be used to fund infrastructure investments, income-support programs, and other items on progressives’ agenda, provided that the inflation rate remains below the central bank’s target (generally around 2%).

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