An AP story in the Washington Post on the IMF's warnings about debt levels told readers that: "Japan's debt is proportionately even bigger -- about twice its GDP -- but the impact is cushioned because most is held by Japanese households." Actually the fact that the debt is mostly held by Japanese households by itself is of little consequence. If Japan had been running large trade deficits and foreigners had bought private assets but not government bonds, then Japanese households and its economy would be in the same situation as if foreigners had bought its debt. The key point is that Japan has been running trade surpluses so that it has accumulated foreign assets rather than selling off domestic assets.
It is important that a very high portion of Japan's debt is held by its central bank. This means that the interest on the debt is paid to the bank. It is then refunded to taxpayers so this debt does not impose any burden whatsoever.
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