Japan has the world’s largest national debt. According to the International Monetary Fund (IMF), Japan’s gross public debt is over 261% of its gross domestic product (GDP)—much higher than the United States’ 121%, and higher than other heavily indebted countries that have faced debt crises. This staggering debt makes many wonder: why hasn’t Japan collapsed? Why isn’t its economy in freefall due to its inability to pay off its debt? To understand why Japan remains an economic powerhouse despite its debt, we first need to explore how it reached this point.
Japan’s national debt is the result of several factors, including demographic challenges, economic stagnation, large-scale government spending, deflation, and fiscal policies. The rise in debt started in the 1990s. In the 1980s, Japan’s debt-to-GDP ratio was just 47%, but by 2000, it had climbed to over 135%. This was largely due to the bursting of Japan’s massive asset bubble in 1991, which led to the “Lost Decade,” a period of economic stagnation and slow growth that stretched into the 2000s.
As the economy slowed, tax revenues dropped, and the government responded by increasing public spending to stimulate growth. Large fiscal stimulus packages, especially in infrastructure, temporarily boosted growth but also drove up debt. By the mid-1990s, Japan’s debt-to-GDP ratio had reached 70%. These stimulus measures, designed to revive the economy, became a long-term crutch that Japan relied on throughout the 1990s and 2000s. However, despite the spending, Japan’s GDP growth remained weak, averaging less than 1% per year, and the government fell into a cycle of borrowing to sustain the economy.
During this time, Japan also began running significant primary deficits, meaning the government’s revenues couldn’t cover its expenditures even before interest payments on the debt were factored in. This led to more borrowing to cover both the deficit and growing interest payments. Simply put, Japan was spending more than it was earning, leading to a spiraling debt problem.
Another major issue was deflation. Beginning in the 1990s, Japan experienced deflation, a drop in the general price level of goods and services. Deflation makes debt harder to repay because, as prices fall, the real value of debt increases. In a deflationary environment, consumers and businesses tend to delay spending in the hope that prices will fall further, which weakens economic growth and tax revenues, exacerbating the fiscal deficit.
Deflation, the opposite of inflation, increases the purchasing power of money. While this sounds good for consumers, it harms the economy because people delay purchases, expecting lower prices in the future. This leads to decreased demand, discouraging businesses from investing and producing goods, which results in slower economic activity, stagnant wages, and rising unemployment.
To combat deflation, Japan’s central bank tried various unconventional monetary policies like quantitative easing and negative interest rates. Quantitative easing (QE) involves the central bank purchasing government bonds and financial assets to inject money into the economy, aiming to lower interest rates and encourage borrowing and investment. Despite these efforts, inflation remained low, making it hard for the government to improve its debt situation.
Japan’s aging population also played a key role in its debt growth. With one of the world’s fastest-aging populations, Japan faces rising social security costs, especially for pensions and healthcare. The old-age dependency ratio—the number of people aged 65 and over compared to the working-age population—has steadily risen and will peak in the 2050s. As the elderly population grows, the government spends more on healthcare and pensions, while the shrinking workforce erodes the tax base, making it harder to finance social security costs without borrowing.
Global economic challenges further worsened Japan’s debt. The 2008 global financial crisis, the 2011 earthquake and tsunami, and the COVID-19 pandemic all hit Japan’s economy hard. The global financial crisis severely impacted Japan’s export-driven economy, and in response, the government implemented more stimulus measures, further increasing the debt.
To address its fiscal imbalance, Japan’s government introduced consumption tax increases. First introduced at 3% in 1989, the consumption tax was raised to 5% in 1997, 8% in 2014, and 10% in 2019. These tax hikes were aimed at reducing Japan’s primary deficit and stabilizing its debt, but they faced political resistance due to concerns that higher taxes could slow economic growth and worsen deflation.
One notable effort to address these challenges came from former Prime Minister Shinzo Abe, who launched Abenomics in 2013. This comprehensive policy package included aggressive monetary easing, flexible fiscal policy, and structural reforms. While it aimed to boost growth, results were mixed. Growth remained weak, and the necessary structural reforms were slow to take effect.
Despite its high debt, Japan has not collapsed, and several factors explain why. First, most of Japan’s debt is owned domestically—over 90% is held by domestic investors like banks, pension funds, and insurance companies. This insulates Japan from the kind of fiscal crises seen in countries like Greece, where much of the debt was held by foreign investors. Domestic investors are more likely to continue buying government bonds even at low or negative interest rates, viewing them as safe assets.
Second, Japan’s ability to borrow at extremely low interest rates has prevented a fiscal crisis. The Bank of Japan’s monetary policies, including QE and negative interest rates, have kept borrowing costs near zero, allowing the government to continue borrowing without a sharp rise in interest payments.
Third, Japan remains one of the world’s largest and most advanced economies, with a highly educated workforce and a strong industrial base. This has helped maintain investor confidence in Japan’s ability to manage its debt and sustain its economy.
Fourth, Japan is a major exporter, particularly in high-value industries like automobiles and electronics. Export revenue has helped stabilize the economy and provided a steady stream of foreign currency, offsetting the fiscal burden of debt.
Finally, Japan’s political stability has reassured investors. Successive governments have pursued pragmatic economic policies, allowing Japan to issue debt at low interest rates and manage its debt load.
While Japan has so far managed its debt, the government knows it must continue working to reduce it. Finding a solution is challenging, as even the world’s top economists struggle to address these complex issues. But for now, Japan remains resilient.