High Public Debt in Japan: The Institutional Quality Perspective

Abstract

This study aims to look at the long-term and short-term links between institutions' quality and public debt. The analysis seeks to shed light on two key aspects: firstly, the influence of country-level institutional quality on public debt, and secondly, the duration of the effects or shocks caused by this relationship. This research employs time-series data spanning from 1996 to 2017 to examine the relationship between institutional quality at the country level and public debt in Japan. Various econometric techniques were employed to analyse the determinants of public debt in Japan, including ’The Unit Root Test, Johansen's Co-integration Analysis, Vector Error Correction (VEC) Model, Variance Decomposition, Impulse Response Analysis, Pairwise Granger Causality Test, and The Toda-Yamamoto Model’. The results of the estimation demonstrate a statistically significant correlation between country-level institutional quality and public debt, both in the long and short term. The evidence indicates that factors such as Voice and Accountability (VA), Political Stability (PS), Government Effectiveness (GE), and Regulatory Quality (RQ) have a negative and statistically significant impact on public debt. Conversely, the Rule of Law (RL) and Control of Corruption (CC) exhibit a positive and statistically significant influence on public debt. The occurrence of public debt can frequently be attributed to the insufficient focus of policymakers, which can be attributed to governance deficiencies. Hence, the implementation of public debt management is necessary to mitigate the possibility of default. The findings indicate that it would be advisable for Japan to enact comprehensive policies aimed at mitigating public debt.