Could someone please explain Japan's Government Debt

Discussion in 'Economics' started by Asparagus, Dec 27, 2008.

  1. Could someone please explain Japan's Government Debt to me

    how can they function with debt that is 150%+ of GDP?

    how is it that their currency is accumulating so rapidly if this is the case? (carry trade aside)?

    how does this compare to america's debt to gdp ratio? one hears so much about how america's government is in trouble from so much debt...what about the Japanese government?

    anyone have any links to articles about this? can't find any good ones on the web...

  2. m22au


    My (very basic) understanding is that the Japanese, being a nation of savers (as opposed to the USA, where the savings rate is close to zero) are a very good source of investment money for Japanese government debt.

    In other words, Japan may not rely upon overseas investment for its government debt.

    On the other hand, the US is heavily reliant upon entities outside the country (specifically Japan and China) to buy its government debt.


    Like the original poster, I am very interested in hearing from others on this subject. I am also surprised that there are so few articles about Japan's high debt to GDP ratio, yet so many articles are written about the marked increase in US Govt debt in recent years.
  3. lrm21


    The main reason as I understand is the majority of Japanese debt is held by the government and is in Yen. As such they are not beholden to a foreign creditor.

    Here is a good article from 2000. I think the fundementals still hold

    The Real Trouble With Japanese Debt

    Adam S. Posen
    Illiquidity, not insolvency, exacerbated by a central bank out to lunch.

    Japan's debt numbers keep rising, to levels never seen by Belgium or Italy, and the Japanese government's bond rating keeps sinking. Scary figures like a projected debt-to-GDP ratio in excess of 170 percent are pointed to as warning signs of an imminent collapse. Adding insult to injury, some analysts include in their assessments not only the outstanding stock of JGBs (Japanese government bonds), but many contingent claims on the government: Japanese rail bonds, pension guarantees, and expected additional financial bailouts.

    Such interpretations of the stock of outstanding Japanese public debt miss the point: The government of Japan is perfectly solvent. As much as a third of the JGBs is held by the government itself, and only about 6 percent of the total is held by foreigners. Unlike Belgium or Italy, or the U.S. in the mid- 1980s, there is no creditor who can come forward and say, "The bill is due," especially since the entire Japanese debt is denominated in yen. There is no sign of meaningful "crowding out," with both interest rates and investment demand low, and the supply of private savings still far greater than the public debt.

    The danger from Japanese public debt is not from insolvency, that is, from the stock of debt amassed, but from illiquidity, that is, volatility in the flow of payments. An austerity minded combination of budget hawks within the Japanese bureaucracy, impatient advocates of structural reform provoking a sense of crisis, and bond rating agencies trying to demonstrate that this time they are ahead of the curve, have all added uncertainty to the JGB market. Investors are encouraged to look for signs of "backsliding" or "runaway spending" in the issuance of Japanese government debt, rather than focusing on the costs and benefits of specific regulations and spending decisions, which are what count.

    click for more;col1