Government finances in Japan - statistics & facts
Japan has the largest debt to GDP ratio in the world. Since the economic recession in the early 1990s, the Japanese government has established a national budget structure in which spending exceeds revenue and that is highly dependent on public bonds. This has resulted in massive amounts of outstanding debt and debt-servicing costs. After spending peaked due to COVID-19, the government has pledged to bring its fiscal balance back on track in the coming fiscal years.
Despite the overwhelming amount of outstanding national debt, Japan has not experienced a sovereign debt crisis. This is mainly because the JGBs are issued in yen and the debt is mostly held by domestic investors, such as the central bank, which holds over 50 percent of outstanding JGBs. Therefore, Japan can adjust interest at comparatively low rates and runs a smaller risk of defaulting in comparison to countries whose debts are primarily held by foreign investors. Additionally, Japan holds a large amount of assets and the highest amount of net external assets in the world.
Reliance on government bonds to cover growing fiscal deficits since the 1990s has resulted in Japan recording the highest debt-to-GDP ratio in the world. With monetary policy slowly shifting, there are fears that the burden on Japan’s fiscal account might increase in the future. The country plans to reduce its debt burden in response to rising interest rates.
Why has Japan accumulated so much debt?
Since the burst of the economic bubble and the following years of economic recession in the 1990s, declining revenues and growing expenditure on economic stimulus packages and social security have resulted in the Japanese government running fiscal deficits each year. Due to a growing reliance on Japanese government bonds (JGBs) to compensate for the revenue shortfall, the country has accumulated massive amounts of outstanding debt and high debt-servicing costs.Despite the overwhelming amount of outstanding national debt, Japan has not experienced a sovereign debt crisis. This is mainly because the JGBs are issued in yen and the debt is mostly held by domestic investors, such as the central bank, which holds over 50 percent of outstanding JGBs. Therefore, Japan can adjust interest at comparatively low rates and runs a smaller risk of defaulting in comparison to countries whose debts are primarily held by foreign investors. Additionally, Japan holds a large amount of assets and the highest amount of net external assets in the world.
Government wants to reduce debt burden
The Bank of Japan made a shift in its monetary policy, raising the key interest rate for the first time in 17 years in March 2024. This came in response to Japan’s economy showing signs of stabilization and a possible end to decades of deflation. After spending peaked during the pandemic, resulting in the highest bond dependency ratio in decades, the government has recently pledged to bring its fiscal balance back on track. One of the reasons for this is that the shift in the central bank’s monetary policy could result in rising interest payment costs for the government and an increased burden on the fiscal accounts. The government announced plans to achieve a primary balance surplus in the fiscal year 2025, meaning that expenses excluding debt servicing cost can be fully covered by revenue.Reliance on government bonds to cover growing fiscal deficits since the 1990s has resulted in Japan recording the highest debt-to-GDP ratio in the world. With monetary policy slowly shifting, there are fears that the burden on Japan’s fiscal account might increase in the future. The country plans to reduce its debt burden in response to rising interest rates.
