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  4. Fall 2025
  5. Japan's Debt Puzzle: Sovereign Wealth Fund from Borrowed Money

Journal of Economic Perspectives

ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)

Japan's Debt Puzzle: Sovereign Wealth Fund from Borrowed Money

  • Yili Chien
  • Wenxin Du
  • Hanno Lustig
Journal of Economic Perspectives
vol. 39, no. 4, Fall 2025
(pp. 3–26)
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Abstract

We analyze the risks associated with Japan's prolonged low-interest rate policies amid a global environment of rising rates. To finance its persistent deficits, the Japanese public sector depends on inexpensive domestic funding to invest in risky assets both domestically and internationally, effectively creating a sovereign wealth fund fueled by borrowed money. Ultimately, these risks fall on Japanese bondholders, depositors, and taxpayers. While the United States faces similar fiscal pressures, it is unlikely to adopt Japan's approach.

Citation

Chien, Yili, Wenxin Du, and Hanno Lustig. 2025. "Japan's Debt Puzzle: Sovereign Wealth Fund from Borrowed Money." Journal of Economic Perspectives 39 (4): 3–26. DOI: 10.1257/jep.20251452

Additional Materials

JEL Classification

  • E23 Macroeconomics: Production
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E62 Fiscal Policy
  • G23 Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
  • H62 National Deficit; Surplus
  • H63 National Debt; Debt Management; Sovereign Debt
  • J11 Demographic Trends, Macroeconomic Effects, and Forecasts