How Public Debt Creates Private Profit

Since 2010, the price of Japanese government bonds (debt issued to fund state spending) and the performance of the Nikkei (an index of leading Japanese companies) have gone hand in hand, as the graph below shows. This isn’t an accident… it’s a direct result of the Asian Capital Development (ACD) model.

Asian “tiger economies” like Japan ran up huge government debts to support export-oriented growth and development. But that development comes at a price. Just like a loan or mortgage, that debt has to be paid off over time… with interest. That debt interest makes up a large portion of total government spending, so governments want to minimize that as much as possible.

But how? Simple: reduce the yields (the return on investment) on bonds. Japan has paid negative yields since 2016. That means bond holders get nothing in return for their investment.

No one wants to invest with no prospect of returns… and that drives investors towards the riskier (but much more profitable) Japanese stock market. And that has pushed up the Nikkei, as this graph shows.

Lowering the yields of government bonds also makes borrowing cheaper for companies, and reduces the interest rate of their corporate debt (known as the effective interest rate, or EIR). As the graph above shows, EIR has decreased as government debt has risen…

That means it’s cheaper for Japanese companies to borrow, and easier for them to increase profits.


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