Japan’s public debt is expected to reach the eye-popping level of 240% of GDP in 2014, solidifying its undisputed position as the most indebted country in the industrialized world. In 2012, of the $437 billion the Japanese government made in tax revenues, it spent a record $257 billion servicing its debt. By the time an approx. $300 billion (2014 figure) in social security spending is taken into consideration, the government has spent all of its money before the sun even rises on the first day of its fiscal year.
That Japan is sitting on a potentially explosive debt crisis is obvious to all; far less so is the matter of how long Tokyo can continue to ignore the problem.
A Different Kind of Debt Crisis
The Japanese government’s blasé attitude towards its massive debt load often puzzles outside observers. After all, it only took a debt-to-GDP ratio of around 150% for Greece to plunge into a disastrous sovereign debt crisis back in 2008. What makes Japan able to sustain such towering debt levels; and in light of the Abe government’s 2014 budget, even build on them?
The answer has to do with who’s holding the debt. Unlike the case with Greece, whose sovereign debt is predominantly held by foreign investors, Japan’s debt is mostly held by its own citizens, through savings accounts in domestic banks and insurance companies. The apparently limitless faith of domestic savers in Japanese government bonds (JGB) has given rise to a minor disruption in the accepted laws of economic causality. Instead of demanding higher returns as the risk of government debt default increases, which would drive up borrowing costs for the Japanese government, domestic savers have kept their purchasing levels constant. This has allowed for the paradox of a 240% debt-to-GDP country which still pays well below 1% interest to borrow, and borrow it does.
Yet it appears the easy money won’t be lasting forever. The rate of foreign ownership of Japanese debt has been creeping up over the past decade, hitting 8.3% in December 2013. This has to do in part with foreign investors seeking a safe haven in the fallout of the 2009 financial crisis and the euro crisis, and in part because the domestic appetite for government bonds is waning. Japan’s household savings rate is dropping as more people retire, from 14% in the early 1990s to only 2% in the past few years, and it is expected to turn negative sometime before 2020. With no savers left to soak up JGBs, it stands to reason that yields will be determined by the same market forces as other countries, which means the government might need to get its fiscal house in order in a hurry.
