Governance of the Management of Public Debt in Japan

Yasuo Goto
JEL codes: 
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.4, No.1, December 2008

This paper deals with the issue of Japans public debt, particularly from a governance perspective. Japans public debt continues to follow a rising path mainly due to the fact that, in the harsh economic climate the country has experienced since the 1990s, the government has ended up increasing public sector spending in order to support the Japanese economy. Yet when we look back over these events, this is not the only problem; there are also concerns over
whether the system has the rules and institutions necessary to deal with such a situation. Even if temporary measures are taken to alleviate a particular burden, there is no guarantee that financial discipline can be maintained in the long term if there are weaknesses in the system of governance.
There are problems first of all not only with public debt management, but also with the regulations which apply to government actions themselves. Since public debt obligation is one of the governments concerns, the roots of any problems with governance are to be found within faults in regulations relating to the government itself. Recent New institutional economics has been fruitful in analyzing the governments internal organizational structure and identifying its characteristic lack of commitment.
Using these concepts to look at Japans situation, we can see that it is characteristic that both the burden of debt is distributed among a variety of departments and that capital allocation and decision making are determined by mutual relations among those departments. If we were to trace the source of debt repayment capital, we would probably find that the burden is borne in the last resort by general accounting. It cannot be denied that such a system could
lead to a weakening of commitment to repayment on the part of the department using the funds. Furthermore, a system in which a number of different departments are involved in decision making would lead to characteristic problems with governance.
The basic policy for dealing with possible failure in governance with regard to public debt is to ensure there is a correspondence between authority and responsibility. Specifically, where you have the authority to incur debts, you have the responsibility to pay off those debts, and where repayment proves difficult, this also remains your responsibility. Where there is a possibility that full responsibility cannot be taken, then part of the authority should perhaps be returned to central government. This paper will consider corporate default legislation as a means of dealing with the former question, and the possibility of general debt management as a means of dealing with the latter.