At the end of September last year, Japan was looking at a figure that would cause chills in any other country in the world and that far from staying there, will continue to grow in the future.
Its public debt reached US$9.2 trillion, or 266% of its GDP, the highest among the major economies.
By comparison, the United States stood at $31 trillion over the same period, but given the size of the world’s leading power, this amount is only equivalent to 98% of its GDP.
The reason for such a bulky figure is that the country has decades boosting domestic spending to keep your economy going.
Its citizens and businesses, which play a key role in economic growth, are extremely reluctant to consume And the state is often forced to spend for them.
“Private savings are huge and investment is weak, implying chronic weakness in demand,” says Takeshi Tashiro, a nonresident senior fellow at the Peterson Institute for International Economics.
“This in turn Requires of Government stimuli“.
“One of the causes of this problem is the demographics of Japan. Its population is very long-lived,” which increases the costs of social security and health care in the state, he explains.
This makes retirees have a lot of uncertainty about their future and prefer to save.
“The aging population is expected to sustain this situation. continue for a long time“, he adds.
But despite this large public debt, lInvestors internationalis Go onn trusting the country And every year they lend you money through purchases of your debt.
How do you explain this?
Japan’s public debt began to skyrocket in the early 1990s, when Its financial and real estate bubble burst with disastrous effects.
In 1991, that ratio was only 39%.
But from that moment on, the growth rate of the economy began to fall drastically, which reduced government revenues, while circumstances forced increased spending.
When the Decade of the 2000s, its debt already exceeded 100% and by 2010 it had doubled again.
The The world’s third largest economy maintained a stimulus path which only in recent decades was amplified by events such as the Great Recession of 2008, the Fukushima earthquake and subsequent tsunami in 2011, and most recently the Covid pandemic of 2020-2021.
Financing spending
To cushion the impact of these events and maintain the annual budget in chapters such as education, health or defense, Japan, like almost all countries in the world, It sells bonds that finance its spending.
That is, it places its debt on international markets with the promise of Return it to the investor in full plus a small profit.
Stable and attractive
Investors then lend their money to the country, especially the more conservative ones they see in those securities. A safe place to put your money.
“In addition to the yield you get, developed country bonds have high liquidity and can easily used as collateral for loans”, Tashiro adds.
However, with levels of debt equivalent to about two-and-a-half times the size of its economy, it is easy to think that the government would have difficulty paying that gigantic figure.
The reason that Japan’s debt has been sustainable over time and that the country has not defaulted, experts explain, is that it has managed to keep the yield on government bonds very low. -pay investors little- and very high market confidence.
“There are investors who prefer stability to profitability and that’s why they opt for Japan to place their excess savings,” economist Shigeto Nagai told AFP.
Pay little
“Japan has kept interest rates extremely low. Although the level of debt is very high, the government Pay relatively little interest to your creditors. It can sustain high debt indefinitely,” says Ken Kuttner, professor of Economics from Williams College in Massachusetts.
The key is also that most of Japan’s debt is not denominated in foreign currency but in yen.
This makes your central bank less exposed to turbulence in international markets.
In fact, 90% of the debt is held by Japanese investors.
“There is not so much Japanese debt held by foreigners. It was around 8% the last time I checked. Most of it is in the hands of Japanese financial institutions and the Bank of Japan,” Kuttner says.
What you get with this is “essentially monetize the government’s deficit”Says.
So the Japanese government sells bonds, which its central bank buys.
“Under the QE policy, the Bank of Japan has been buying large amounts of public debt to keep long-term interest rates low, which is supposed to help stimulate the economy.”
“Consequently, the government does not have to find buyers in the private sector for all the debt it issues, and the Little interest you pay on debt comes back to the government. This is essentially monetizing the government deficit, which normally leads to high inflation; disconcertingly, that hasn’t happened in Japan,” explains the economics professor.
So while in the rest of the world interest rates have not stopped rising, in Japan they remain low.
“This is mainly due to the still stubborn deflation mentality of households and private companies and a high degree of policy coordination between the government and the Bank of Japan” explains David Kohl, chief economist at investment firm Julius Baer.
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