How the world’s most indebted country still has international credit

The reason behind Japan’s huge debt is the fact that the country has been ramping up domestic spending for decades to keep its economy afloat.

Its citizens and businesses play an essential role in economic growth, but they are very conservative when it comes to consumption. Therefore, the state is often forced to spend on them.

“Private savings are huge and investment is low, leading to chronic weak demand,” said Takeshi Tashiro, non-resident principal investigator at the Peterson Institute for International Economics in the US. This, in turn, requires government stimulus.

He explains that “one of the reasons for this problem is Japan’s demographics. And its people live too long,” which increases health care and social security costs for the state. It also makes retirees feel insecure about the future and prefer to continue saving.

“It is estimated that the population aging that maintains this situation will continue for a long time,” Tashiro adds.

But despite this huge public debt, international investors still trust the country, and every year, they lend Japan money to buy its debt.

Japan’s public debt began to rise in the early 1990s, when its financial and real estate bubble burst, with catastrophic effects.

In 1991, debt accounted for only 39% of GDP. But since then, the growth rate of the economy began to decline significantly, which reduced the state’s revenues, while circumstances forced the government to increase its spending.

In the 2000s, government debt has already exceeded 100% of GDP, and in 2010 it doubled again.

Japan, the world’s third largest economy, has kept track of stimuli that, in recent decades alone, have been amplified by events such as the Great Recession in 2008, the earthquake followed by the tsunami in 2011, and most recently, the Covid pandemic in 2020-2021.

To mitigate the impact of these events and maintain the annual budget for education, health and defense, Japan, like almost all countries in the world, sells bonds that finance its spending. That is, the state exposes its debts to international markets, with the obligation to return them in full to investors, with interest.

Investors then lend their money, especially the more conservative ones, as these bonds are considered a safe place to put money.

“In addition to the offered profitability, bonds from developed countries are highly liquid and can easily be used as collateral for loans,” explains Tashiro.

But with debt levels roughly two and a half times the size of its economy, it is easy to imagine that the Japanese government would struggle to pay this huge amount.

Experts point out that the reason Japan has maintained its debt sustainable over time, without falling into default, is that the country has been able to maintain government bond profitability at very low rates, paying little to investors, with a high level of confidence in the market. .

“There are investors who prefer stability over profitability, and therefore choose to invest their accumulated savings in Japan,” economist Shigeto Nagai told AFP.

says Ken Kutner, professor of economics at Williams College, Massachusetts, in the US.

Another reason is the fact that most of Japan’s debt is not denominated in foreign currency, but in yen, its home currency. This makes its central bank less exposed to the turmoil of international markets.

In fact, 90% of the debt is in the hands of Japanese investors.

“There’s not a lot of Japanese debt to foreigners,” Kuttner says. “It was about 8% last time I checked. Most of it is in the hands of Japanese financial institutions and the Bank of Japan.”

With this, it is possible to “fundamentally convert the government deficit into cash,” he said. That is, the Japanese government sells bonds, but they are bought by its central bank.

According to the policy of quantitative easing [de estímulos]The Bank of Japan is buying large amounts of public debt to keep long-term interest rates low, which it believes helps stimulate the economy,” explains the professor.

“Thus, the government does not need to find private buyers for all the debt issued, and the low interest paid on the debt accrues to the government. This is essentially monetizing the government’s deficit, which usually causes high inflation; but surprisingly, this has not happened. In Japan,” Kuttner concludes.

This is why, while interest rates continue to rise in the rest of the world, they remain low in Japan.

“This is mainly due to the deflationary mentality, which is still ingrained among households and private firms, and the high degree of policy coordination between the government and the Bank of Japan,” explains David Kohl, chief economist at Swiss investment firm Julius Baer.