Japan’s economic landscape is defined by its substantial national debt, a situation largely shaped by the dramatic collapse of its asset bubble in the late 1980s. This period saw an astronomical rise in property and stock values, driven by loose lending and rampant speculation. The bubble’s bursting around 1992 ushered in decades of economic sluggishness.
In response to stagnation, Japan’s government chose to finance its expenditures through borrowing rather than raising taxes, as consumer and corporate spending dwindled and savings increased. The central bank’s strategy of slashing interest rates, even into negative territory, aimed to spur economic activity and keep debt servicing costs low. Yet, this policy, combined with the growing financial burdens of an aging populace and rising healthcare needs, inadvertently fostered a self-perpetuating cycle of debt accumulation and sluggish economic growth.
The low-yield environment in Japan historically encouraged its investors to seek lucrative opportunities overseas. This gave rise to the ‘yen carry trade,’ a popular investment strategy that leveraged Japan’s low borrowing costs to fund investments in higher-yielding foreign assets. This outflow of Japanese capital played a crucial role in keeping global interest rates down and bolstering international market liquidity. Although this trend is changing with rising Japanese yields, the country’s significant holdings of foreign assets, primarily long-term investments like US government bonds, suggest that any market adjustments are likely to be orderly.
While Japan’s gross debt-to-GDP ratio is an imposing 250%, its net debt, accounting for assets, is approximately 140%. This provides a more nuanced view compared to the US’s gross debt of 120% and net debt near 96%. The majority of Japan’s government debt, close to 90%, is held internally by Japanese entities, and its long maturity profile offers protection against immediate interest rate shocks. International rating agencies continue to recognize Japan’s creditworthiness, assigning it A-level ratings. The nation’s long-standing debt challenge is a multifaceted issue stemming from historical economic events, enduring structural issues, and demographic shifts, all of which have had a profound influence on global finance.