• debt financing;
  • fiscal consolidation;
  • fiscal deficit;
  • government bonds;
  • Japan;
  • public debt

This article explores the idiosyncratic institutional features of public debt financing in Japan that have enabled the government to finance increasing public debt at low costs. It examines the three key aspects that contributed to the Japanese government bond (JGB) market development: (1) the surplus financial balance of the household sector; (2) the strong tradition of public financing; and (3) home bias, that is, little dependence on external financing. It argues that Japan's financial institutions' capacity to absorb JGBs is reaching the limit and that the Japanese government needs to take bolder measures to reverse the flow of financial intermediation, from the public to the private sector. It also suggests that restoring people's trust in the government's competence and leadership is an essential element for successful fiscal consolidation.