Global Government Debt Enters -Domar’s condition has not been met in Japan, and achieving a fiscal surplus is essential

 Against the backdrop of high inflation, long-term interest rates are soaring worldwide. The rise has been particularly steep in southern European countries, and in the background to this are mounting concerns that an increase in the burden of government interest payments could worsen public finances. If high inflation persists in the future, Domar’s condition (long-term interest rate nominal economic growth rate) will not be met in many countries, increasing the likelihood of an explosion in government debt. Two pathways can lead to Domar's condition not being met.

 The first is increases in the jurisdiction’s policy rate. If the current high inflation were to be checked only by raising interest rates to suppress demand, rates would have to be raised by 8% in the U.S. and 7% in the eurozone. If supply constraints are not resolved, central banks will be forced to hike their policy interest rates significantly to curb demand, which could lead to higher long-term interest rates and lower economic growth.

 The second is greater uncertainty surrounding inflation. Prices are known to be more volatile and uncertain during periods of high inflation. This pushes up long-term interest rates and reduces the rate of economic growth through such factors as a reluctance to invest. If uncertainty about inflation volatility were to expand to the level of the 1980s, it is estimated that long-term interest rates would exceed economic growth rates by 2-4% in southern European countries and elsewhere.

 In Japan, too, monetary policy could be normalized depending on price and wage trends, and a phase in which long-term interest rates exceed the growth rate could take hold. In Japan, spells during which Domar's condition has not been met over the past 20 years have been longer than in other countries, and have been a factor in the expansion of government debt. Given the possibility of further expansion of government debt due to inflation becoming chronic, there is an urgent need to set out a path toward achieving a surplus in the primary balance.

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