Japan’s national debt

By Ichiro Suzuki

Since the mid-1990s, the notoriously high accumulated debt of Japan’s public sector has been a source of a considerable concern in the community of the international finance. Japan started piling up debt in the early 1990s to finance infrastructure projects in order to boost domestic demand that fell sharply upon the burst of the notorious bubble at the outset of the decade. Social security costs’ sharp rise, due to the aging of its population, made the debt situation worse. According to the Ministry of Finance of Japan, its debt to GDP ratio stood at a dizzying 237% in 2019, dwarfing other highly indebted countries such as Greece (185%), Venezuela (182%) or Italy (132%). The United States has drawn considerable attention in recent years on the growth of debt, but the Federal government’s debt amounts to ‘only’ 104% of the economy.

Despite sky-high positions, the size of debt in relation to the Japanese economy has become more or less stable in recent years, especially since Shinzo Abe rose to power and revitalized, or a sort of,  the economy. Economic growth has been still paltry compared to what it once was, but resumption of nominal growth after years of mild deflation has made it possible for the economy to grow faster than debt. During much of the 2010s, the ratio of national debt to GDP has been ‘stable’ at about 235%.

At a time when the Japanese government has been struggling to push the number down through higher growth, coronavirus is set to drive the debt position to move upward sharply. While this upward move is lamentable, at least it comes with a consolation this time that it’s a global mega trend. Like anywhere else in the developed world, the government has put together fiscal policies to assist small and medium businesses, restaurant owners, as well as airlines, etc, and spraying cash to the people who have lost income. The size of such rescue package is dubbed as 10% of the Japanese economy on the surface. The real cost to the government, which is called ‘pure water’ is tuning out to be 26 trillion yen ($243 billion) that the Diet has passed at the end of April. The size of supplementary budget can be compared to the regular budget that is 103 trillion yen ($960 billion) for the fiscal 2020.

This supplementary budget is going to be deficit-financed and this may not be the last one for this fiscal year that has just started on April 1. There is no guarantee that Japan lives through the next few years without another supplementary budgets, either, since it would take a considerable amount of time for the economy to get back onto a self-sustained growth trend. Worse, tax revenue is definitely going to fall well short of the initial projections and stays low in the next several years amid the deepest global economic downturn since the 1930s. 

So debt is set to rise again. Does it matter? It probably does not in the immediate future. Led by the Federal Reserve Bank, major central banks have embarked on aggressive buying of not only government bonds but also some risky securities. As for the Bank of Japan, the central bank was running out of Japanese government bonds to buy, having bought up the bulk of the outstanding securities still left in the market. Issuing of new securities to finance the supplementary budget gives the BoJ what they have been looking for. Even from the dizzying level of 240% to GDP, the financial markets would tolerate an effort to prevent the economy from falling into a deeper hole. If anything, Japan is still regarded as being in a better position than the countries without full control over monetary and fiscal polices, such as the euro-zone countries or some countries that owes debt denominated in otter currencies than their own.

In an extreme financial condition when the talk of perpetual bonds have come up, Japan is in theory ready for such instruments that would never have to be repaid. For the outstanding JGBs owned by the Japanese, their maturity can be extended into perpetuity with a stroke of pen, not even requiring a change in law. That said, there is always a risk that the financial market shifts its expectation on the long-term outlook of the inflation in a very subtle manner. If it changes its mind one day and think demand no longer remains depressed for an indefinite period, the result could be catastrophic. 

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan