By the end of September last year, Japan was in debt to such an extent that you would be shocked to hear the amount of debt and the great thing is that this debt burden will not stop here but will continue to increase in the future.
Japan’s total debt has reached 9.2 trillion US dollars, which is 266 percent of its GDP. This amount of debt is the highest among the major economies of the world.
For example, if we look at the amount of US debt compared to Japan, it is 31 trillion dollars, but this amount is only 98% of the total GDP of the US.
What is the reason for such a large volume of loans?
The journey of reaching such a large amount of debt is not a few years, but it has taken many decades to increase the burden of loans taken in the struggle to keep the country’s economy running and meet the expenses.
Businesses, which play a key role in Japan’s civic and economic development, are reluctant to borrow while the state often forces them to spend.
Takeshi Tashiro, a non-resident senior fellow at the Peterson Institute for International Economics, says, “People save a lot on their own, but they don’t tend to invest in the market in comparison.”
According to him, one of the main reasons for this problem is the aging of the population in Japan, which increases the government’s spending on social security and health services. Most of Japan’s population faces a lot of uncertainty about their future after retirement and therefore prefer personal savings.
However, despite this large volume of loans, what is surprising is that international investors trust Japan to invest.
Explanation of this large volume loan
Japan’s debt burden began to rise in the early 1990s when its financial system and real estate system burst like a bubble with disastrous results. And at the same time, Japan’s debt ratio was only 39 percent of its GDP.
Due to this situation, the revenue of the government decreased while on the other hand the expenditure started to increase.
Within a few years, by the year 2000, Japan’s debt burden had risen to 100 percent of its GDP, which doubled by 2010.
The world’s third-largest economy has continued to grow at a pace that has been affected by the 2008 global recession, the 2011 Japan earthquake and tsunami, and most recently the coronavirus pandemic.
Japan, like the rest of the world, sells bonds to cushion the impact of these events and manage its finances to maintain annual budgets for areas such as education, health and defense.
In other words, Japan sells its debt on the international markets in the form of bonds with the promise that it will return not only the full amount of the investor’s money, but also some profit on it.
Stable and attractive
After this assurance from Japan, investors put their money there, especially the very conservative global investors who, although the returns are low, the principal remains very safe.
Regarding investor interest in Japan, Tashiro adds that ‘bonds offered by developed countries (lenders) can easily be used as collateral for loans (so they are safe investments). not considered)’.
However, if the size of the debt is almost two and a half times the size of the country’s overall economy, then it is not difficult to imagine that the government will definitely have a hard time repaying this huge amount?
According to experts, the reason why the country did not go into default despite this increasing volume of debt is that Japan keeps the yield on government bonds very low, but on the other hand, it has a lot of trust and confidence in the safe investment market. goes
Economist Shi Nagai told the AFP news agency that “there are some investors who prefer investment security and stability over high returns.” And they choose Japan to secure their extra savings.
Low payment
Ken Kutner, professor of economics at Williams College in Massachusetts, says that Japan has kept interest rates on loans extremely low. Despite high debt levels, the government pays relatively low interest to its borrowers. And this strategy can sustain high debt indefinitely.
Importantly, most of Japan’s debt is not in foreign currency, but in Japan’s own currency, the “yen”.
Professor Ken Kuttner says the advantage of having the debt in its own currency is that Japan’s central bank is less exposed to the occasional fluctuations in international markets. In fact, 90 percent of Japan’s outstanding debt has been purchased by investors.
Professor Kuttner says that most of Japan’s debt is not held by foreigners, adding that the last time he checked, “it was about 8 percent.” Most of it is held by Japanese financial institutions and the Bank of Japan.
He says the move essentially monetizes the government deficit. So, simply put, when the Japanese government sells bonds, its central bank buys them.
Under this policy, the Bank of Japan is buying large amounts of government debt to keep long-term interest rates low, helping to keep the economy afloat.
“As a result, the government does not have to find private sector investors for all the debt it issues, and the interest paid on the bonds goes back to the government through the central bank,” Professor Kuttner explained.
This is essentially monetizing government deficits, which usually leads any economy to hyperinflation, but Japan has not seen this happen while the rest of the world continues to raise interest rates. So the interest rate in Japan is low.