Japan’s economy is characterized by the world’s most significant debt burden, a phenomenon largely explained by the aftermath of the late 1980s asset bubble collapse. This era saw rampant speculation drive property and stock markets to dizzying heights, only for them to crash, leading to decades of economic stagnation and deflationary pressures.
Government responses to this prolonged slowdown included increased borrowing to fund public expenditure, as businesses and individuals became hesitant to spend and focused on saving. The Bank of Japan’s monetary policy of drastically reducing interest rates, including venturing into negative territory, was intended to stimulate borrowing and investment. However, this, combined with the escalating costs of an aging population and healthcare, perpetuated a cycle where economic stimulus led to greater debt, which in turn suppressed growth.
A key consequence of Japan’s low interest rate environment was the global ‘yen carry trade.’ Japanese investors borrowed yen at minimal cost to invest in higher-yielding assets in other countries. This substantial capital outflow played a vital role in suppressing global interest rates and ensuring ample liquidity in international financial markets for many years. While the current trend of rising Japanese yields signals the end of easy carry-trade profits, Japan’s substantial foreign asset holdings, primarily long-term investments like US government bonds, indicate that any market adjustments will likely be orderly and gradual.
Understanding Japan’s debt requires looking beyond the headline gross debt-to-GDP ratio of roughly 250%. The net debt, at around 140%, presents a more manageable picture. A significant portion, nearly 90%, of Japan’s government debt is held domestically, and its long maturity profile (averaging nine years or more) insulates it from immediate interest rate fluctuations. Credit rating agencies maintain a stable outlook for Japan, granting it A-level ratings, reflecting confidence in its financial stability. Japan’s debt is a deep-seated issue born from historical economic events, structural rigidities, and demographic trends, with its financial strategies continuing to shape global economic conditions.