If I citizen of a country buys that country's bonds then a portion of their interest is collected back as capital gains. Thus the country actually pays (interest rate * (1- capital gains rate) - inflation rate). So because the overwhelming majority of Japan's debt is owned by it's own citizens and it's in it's own currency they can easily drive their loan servicing costs below zero at fairly modest inflation rates. They can also achieve the same effect by slightly bumping the capital gains tax which is currently set at 15%.
Great arguments! I still don't think that paying 50% of your tax revenues in interest rate is sustainable (especially not when the interest rates are as low as they already are). However, your point about capital gains combined with high level of domestic creditors certainly changes the math.
People where buying billions of dollars of short term treasury bonds with a negative interest rate recently, because they are safer than mattress's. However, I was talking about real costs after inflation ex: Inflation = 2%, government bond's yield 2.5% capital gains = 25%, mattress yield = 0%. (1 + .025 * .75)/1.02 = 99.88% vs (1/1.02) = 98.04%
The only number the government does not control is the interest rate they need to pay.
