In the Philippines, the topic of government debt often sparks heated debates. Many people criticize the country’s debt levels, with some arguing that the government borrows from the wrong sources, particularly when it comes to China. There are widespread concerns that debt from China could lead to a “debt trap,” where high-interest rates could become a burden. However, there’s another major lender to the Philippines that doesn’t get the same level of criticism—Japan.
Japan is one of the Philippines’ biggest financial partners, lending trillions of yen (or billions of dollars) to fund essential infrastructure like bridges, schools, and railways. Unlike the loans from China, Japanese loans come with extremely low interest rates and long repayment periods, often spanning decades. This makes Japan’s financial support less of a burden and more of a partnership aimed at helping the Philippines develop.
According to the Bangko Sentral ng Pilipinas, Japan is the Philippines’ largest creditor, with loans amounting to about $14.8 billion. To put that in perspective, the second-largest lender, the United Kingdom, has lent $4 billion, followed by Singapore with $3.2 billion. Japan also contributes to the Philippines through multilateral institutions like the Asian Development Bank (ADB), where it plays a major role.
Japan’s support doesn’t stop at just lending money. They are deeply involved in individual projects that are crucial to the country’s development. For instance, Japan’s loans have funded the North-South Commuter Railway Project, the Metro Manila Subway, and the rehabilitation of MRT Line 3. These loans often have incredibly low interest rates, sometimes as low as 0.1%, with repayment periods of up to 40 years. This contrasts sharply with China’s average interest rate of around 3%.
However, it’s essential to understand that these loans aren’t just acts of goodwill. Japan benefits economically and politically from these arrangements. Economically, aiding the Philippines helps create opportunities for Japanese businesses to thrive in the country. Many big Japanese companies like Toyota and Mitsubishi are major investors in the Philippines, and by helping develop the country, Japan ensures a stable environment for these companies to grow.
Politically, Japan’s loans and aid help solidify strategic alliances in the region. In a time when China’s influence is growing, Japan’s support to the Philippines also serves to counterbalance China’s power, especially in critical areas like maritime security. This collaboration helps protect Japan’s own interests while also strengthening its ties with the Philippines.
So, why can Japan afford to lend at such low interest rates? Japan has one of the largest foreign exchange reserves in the world, providing it with the financial muscle to offer low-interest loans. Additionally, Japan’s domestic policies, like maintaining low interest rates to stimulate its economy, allow the government to borrow money cheaply and extend the same favorable terms to other countries.