For the beginning of the year, I have updated the chart I introduced last April.
It looks as though Japan has moved beyond the Lehman shock and returned to a growth trajectory.
Meanwhile, the GDP deflator looks like this. We can see that deflation has continued for some time.
Given these conditions, long-term interest rates naturally remain stuck at low levels.
Something occurred to me, though: if deflation ends and long-term interest rates rise, the consequences will be serious. If nominal growth reaches around 3% and long-term interest rates likewise rise by around 3%, Japan will use almost all its tax revenue merely for government-bond yields. If GDP is approximately ¥500 trillion, growth of 3% adds around ¥15 trillion. If 4 tenths of that becomes tax, tax revenue increases by ¥6 trillion. But interest payments rise by ¥27 trillion…. Well, naturally… (I will refrain from saying more).
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