Equities
Japan’s debt mountain: A crisis or a misunderstanding?
7 min read 23 May 25
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Rising government bond yields have focused attention on Japan’s high levels of government debt and aging population. Although the situation looks challenging, Carl Vine, Co-Head of Asia Pacific Equities, believes that investors overlook some important factors that mitigate the potential economic risks. He explains why he thinks the real threat is not understanding the complex situation.
Japanese government bond yields are experiencing a non-trivial move; rises at the long end of the yield curve in particular are getting due attention. Hot on the heels of this, we will no doubt soon be reading re-runs of old articles with dire prognostications about Japan’s debt level and demographics.
The headlines write themselves: world’s highest debt-to-GDP, aging population, economic stagnation. A slow-motion fiscal collapse, some will say, is inevitable.
Like many well-worn laments, this one is built on selectively curated facts and a remarkable ignorance of context.
Let’s acknowledge the reality first, lest we be accused of cheerleading. Japan’s gross government debt is staggering: it amounts to ¥1.3 quadrillion (c.US$ 8.7 trillion), well north of 200% of GDP1.
Its population is aging and shrinking2, its economy remains relatively sluggish, and yes, bond yields have recently begun to stir from their long slumber, reflecting both inflationary flickers and the Bank of Japan’s (BOJ) tentative steps toward normalisation of monetary policy.
Japan’s domestic debts
So far, so ominous. But we should now consider what this narrative omits.
First, much of this debt is held by the Japanese themselves − a uniquely domestic affair. Most significantly, nearly half is owned by the BOJ, which doesn’t behave like a hedge fund or a hostile creditor.
The interest payments it receives on government bonds are returned − after costs − as profits to the Ministry of Finance in what might be considered a soft claim from the left hand to the right.
Second, Japan has not “printed” its way into a corner. While the BOJ’s balance sheet has clearly expanded massively, it has not dumped yen into the streets. Inflation is tame. Much of the monetary base is sterilised as excess reserves, quietly earning interest but not chasing goods. The BOJ holds its bonds to maturity. It does not mark them to market. The supposed risks of loss are as much accounting fiction as economic fact.
Third, Japan’s net debt is far lower − around 114% of GDP − when you subtract the government’s considerable financial assets. That’s still high, but closer to Italy than to Weimar Germany.
“This is not a nation living beyond its means; it is a country reluctant to spend.”
Fourth, Japan’s private sector is a leviathan of savings. Households hold over ¥2,000 trillion in financial assets3. Corporates are flush with cash. This is not a nation living beyond its means; it is a country reluctant to spend.
Managing risks in Japanese debt
Sovereign debt issued in a nation’s own currency, held by its own institutions, and serviced by a central bank with unlimited yen at its disposal is not subject to the same laws that govern households or companies.
It can be rolled over indefinitely, and the real measure of sustainability is not payback, but the cost of carrying it. That cost, for Japan, remains − despite recent rises − remarkably low: in the order of 10 trillion yen. Even at c.1.7% of GDP in interest costs, Japan pays considerably less than several of the world’s largest economies in terms of interest.
Yes, there are risks. If inflation takes root and bond yields surge, the BOJ could face operating losses, as other central banks already have. Annual BOJ remittances to the treasury have been in the order of 2 trillion yen in recent years. This could go to zero, which would be annoying but not deathly for the Ministry of Finance.
If confidence in yen-denominated assets erodes, capital may eventually flee. But these are ifs − not inevitabilities. They are risks to be managed, not omens of apocalypse.
A complex situation
The narrative of Japanese decline has been written and rewritten since the 1990s. And yet the world’s third-largest economy remains stable, peaceful, technologically sophisticated, and institutionally robust. If this is failure, one wonders what success would look like.
It is not blind optimism to recognise Japan’s situation as complex rather than catastrophic. It is intellectual honesty. Perhaps the real threat isn’t the debt itself – it’s the refusal to understand it.
1 The Japan Times, ‘Japan's government debt climbs to record ¥1.32 quadrillion’, (japantimes.co.jp), February 2025.
2 Asia News Network, ‘Japan’s population declining faster than anticipated, threatening national pension scheme’, (asianews.network), April 2025.
3 Kyodo News, ‘Japan household assets top 2,000 tril. yen for 1st time amid pandemic’, (english.kyodonews.net), March 2022.
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