Is inflation the only answer for Japan?

The public debt problem in Japan has of course been brewing for many years without boiling over into a full-blown crisis. However, adverse demographics could soon cause the government’s finances to spiral out of control. Japan’s low potential growth rate, the lack of political will behind fiscal austerity, and the fact that most debt is held by domestic financial institutions, all limit the options available to policy-makers. The upshot is that higher inflation is the only plausible answer to Japan’s fiscal problems, but even achieving the current target of 2% may not be enough.