Olivier Blanchard, former chief economist at the International Monetary Fund, said zero interest rates have disguised the underlying danger posed by Japan’s public debt, likely to reach 250pc of GDP this year and spiralling upwards on an unsustainable trajectory.
“To our surprise, Japanese retirees have been willing to hold government debt at zero rates, but the marginal investor will soon not be a Japanese retiree,” he said.
Prof Blanchard said the Japanese treasury will have to tap foreign funds to plug the gap and this will prove far more costly, threatening to bring the long-feared funding crisis to a head.
“If and when US hedge funds become the marginal Japanese debt, they are going to ask for a substantial spread,” he told the Telegraph, speaking at the Ambrosetti forum of world policy-makers on Lake Como.
Prof Blanchard, now at the Peterson Institute in Washington, said the Bank of Japan will come under mounting political pressure to fund the budget directly, at which point the country risks lurching from deflation to an inflationary denouement.
“One day the BoJ may well get a call from the finance ministry saying please think about us – it is a life or death question - and keep rates at zero for a bit longer,” he said.
"The risk of fiscal dominance, leading eventually to high inflation, is definitely present. I would not be surprised if this were to happen sometime in the next five to ten years."



Prof Blanchard said the risk for the eurozone is the election of populist “rogue governments” that let rip with spending in defiance of Brussels. “Investors would have serious thoughts about buying their sovereign bonds,” he said.
The European Central Bank would be legally prohibited from activating its back-stop mechanism (OMT) to prevent yields soaring since these governments would not be in compliance with EU rules. “Some of them have very high debt and presumably would have to default,” he said.


One thing he is not worried about is running out of monetary ammunition. “There is an argument that QE actually becomes more effective, the more you use it,” he said.
As a central bank buys more bonds, the more it has to pay to convince the last hold-outs to sell their holdings. “The effect on the price plausibly becomes stronger and stronger,” he said.
Prof Blanchard said the authorities should stick to plain vanilla QE rather than experimenting with “exotic stuff”.
He waved aside talk of ‘helicopter money’ with contempt, calling it nothing more than a fiscal expansion by other means. It makes little difference whether spending is paid for with money or bonds when interest rates are zero.
He said negative interest rates – or NIRP – have complex side-effects and damage the banks, which can’t pass on the rates to depositors. “Banks are already in enough trouble without adding this one,” he said.


Professor Blanchard refuses to join the apocalyptic chorus on Brexit but advises the British people to enter these uncharted waters with open eyes. Divorce will not be a short shock followed by swift recovery.
“The cost of exiting will not be seamless, and the uncertainty will last for a very long time afterwards. Firms deciding whether to locate plant in the UK or in the Continent will wait. Investment will drop,” he said.
But the sky will not fall for the Gilts market. “Will financing be more difficult after Brexit? Will investors see the British government as more risky? I don’t think so,” he said.
しかし英国債市場が崩壊することはないだろう。「ブレグジット後、資金調達は今より困難になるでしょうか? 投資家は英国政府のリスクはこれまでより高まったと思うでしょうか? 私はそうは思いません」と彼は言う。