This paper compiles and reviews the evolution of Japan’s Public Sector Balance Sheet (PSBS). In the past, large crossholdings of assets and liabilities within the public sector played a role in sustaining a high level of public debt and low interest rates. The Fiscal Investment and Loan Fund (FILF) channeled all postal deposits and pension savings to financing of public sector borrowing. After the FILF refrom in 2000, however, the Post Bank and pension funds shifted their assets to the portfolio investments and are seeking to maximize risk-adjusted returns. This has changed the implications of crossholdings for public debt management. In the future, population aging is expected to add more pressures on the PSBS, which already saw a considerable decrease of net worth over the last three decades.

This paper compiles the Intertemporal Public Sector Balance Sheets for all G7 countries and examines their relationship with government borrowing costs. In 2018, all G7 countries have negative Intertemporal Net Financial Worth (INFW), falling short of their intertemporal budget constraint. A decomposition of the evolution of INFW shows that short-term fluctuations are mainly driven by fiscal policy changes, while in the long run demographic changes and health and pension obligations play a larger role. We find that on average a 10 percentage point of GDP increase in INFW reduces the (future) 10-1 year sovereign yield curve spread by 2.8 basis points. This results suggest that financial markets pay attention to governments' future policy obligations, in addition to its current assets and liabilities.

This paper examines how a regime of penalties or sanctions for breaching public financial management (PFM) laws and regulations can be designed to increase compliance with these laws. Financial irregularities can be as high as five to eight percent of GDP or more in some poorly administered countries. If a sanctions regime is to be effective, it should meet the three core principles of impartiality, proportionality, and transparency. An empirical analysis of sanctions regimes and recovery rates in 26 countries suggests that excessive use of “harsh” sanctions could negatively affect the level of compliance. The design of a sanctions regime should include both “soft” and “harsh” measures which are proportionate to the severity of financial irregularities. The paper describes three institutional models (“financial police,” “risk‐based,” and “sanctions coordinator”) that countries have used to implement a sanctions regime. An approach targeting expenditure that is highly vulnerable to irregularities tends to achieve a better recovery rate than a regime based on a “mass investigation, mass sanctions” approach. A tailored approach based on the third model may be appropriate for low‐capacity countries.

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