Japan government debt


9 May 2013.

With the population aging, domestic demand (which has been almost all of demand) for Japanese Government Bonds is likely to fall. A crisis could develop very quickly, in that even a small rise in interest rates could cause a large sell off in JGBs owned by banks and foreigners, and a disruptive rise in government interest costs.


9 May 2013 (Aprl MOF quarterly).

Debt estimated through 2014:

Yields through Q1 2013.

Compare the breakdown of holders at the end of 2009 with most recent:


Japan demographics (13 Aug 2014) The population of those 65 or older is rising strongly while the population of those at a typical working age, 20-64, has peaked and is falling. The ratio of the former to the latter, known as the dependency ratio, is high and will continue to rise.

The most important consequence is that household savings, which used to fund a significant fraction of the government deficit, are unlikely to do so in the foreseeable future. In 2012 household savings were about 4 trillion yen, while the net government bond issuance this year is projected to be 41 trillion (see the MOF budget page). And because of the rising dependency ratio, the household savings rate is more likely to go down than up.

There is also a purely statistical consequence. Many moan about Japan's slow growth and blame policy mistakes, but growth per working person has actually been healthy, that is, slow growth is due to demographics, not policy.


See also

Selected commentary:

Clippings below were used in the construction of this page

The debtor nations need to be considered in aggregate

27 Oct 2009.

“Tough times for government bonds after the credit crisis. David Roche ”

“for the first time in post-war history, Japan will be feeding at the same trough of global savings as the US and the UK. An unprecedented 25 per cent of current global savings will be sucked up by OECD government debt financing. That will crowd out productive investment and bodes ill for inflation.

As the US, UK and Japan will be trying to borrow the same buck in international markets, bond yields will rise when QE stops and there is an even modest recovery in credit demand from the private sector. That alone is enough to prevent the development of a new credit bubble similar to those that have been economic drivers for nearly two decades. All credit bubbles rely upon underpriced capital being in oversupply relative to fundamental needs of an economy. Given the huge demand for capital by increasingly insolvent governments, those conditions won't exist.”

Possible crisis in Japanese sovereign debt

2 Nov 2009. FT fm p24.

“Japan sovereign debt crisis looms. Edward Chancellor”

“A debt trap appears when the rate of interest paid on government debt is higher than the economy's growth rate and the public revenues are insufficient to cover its financing charges. When this happens the fiscal position becomes unstable and the debt spirals upwards. This has been the case in Japan for several years. A bad situation has been made even worse by the global financial crisis.

Japan's national debt is fast approaching 200 per cent of GDP. The debt mountain is the result of prolonged economic weakness and successive fiscal deficits since the bubble economy collapsed in 1990. These problems are compounded by the fact that Japan's population is now shrinking. The economy's trend growth rate has fallen and tax receipts are shrinking, while welfare payments for pensioners are rising. Japan's debt trap, it seems, is structural rather than cyclical.

Japan is not the first country to see its public debt climb to nearly twice the national output. After the Napoleonic Wars, Britain's national debt was about 170 per cent of GDP. But a century of steady economic growth and Victorian thriftiness brought this debt down to 30 per cent of GDP by 1914. Given its declining population, it's difficult to see Japan's future economic growth matching that of Britain's.

Japan's problems are not just demographic. Structural rigidities persist. Married women, for example, find it difficult to rejoin the workforce. Tokyo has shown little serious intent on getting its public finances under control. The newly-installed DPJ government didn't even mention the deficit in its election manifesto. …

While the supply of Japanese government bonds looks set to increase, the outlook for demand is not encouraging. As the population ages, Japanese pension funds are more likely to be selling bonds than buying them. The household savings rate is plunging towards zero. ”

Perhaps rising tax revenues will help with debt

8 Dec 2009. FTUSA p22.

“Foundations are in place for Japan to start moving forward. Andrew Smithers”

“Japan, with its high gross debt to GDP is often seen as being especially vulnerable, but in many ways it is better placed than either the US or the UK. This is partly because the debt problem is frequently overstated, as net debt is only about half the gross level, but also because the switch from investment, financed by untaxed depreciation, into incomes and spending which are taxed twice, will mean that tax revenue should rise rapidly with recovery. Japan is a country of high tax rates, but has the lowest tax revenue to GDP among G5 countries. It combined, in the first six months of this year, the top corporation tax rate with negative revenue from it. It is easier to raise tax revenue when it is low than when it is already high and particularly easy when tax rates are already high but not collecting much revenue.

In addition, the Japanese bond market has little if any exposure to two great threats found elsewhere.

A rise in inflationary expectations is one and such fears are less likely to pick up in Japan than almost anywhere. Another is the need to reverse quantitative easing. But the Bank of Japan, unlike the Bank of England and the Federal Reserve, has no mass of bonds on its balance sheet that must be sold.”

Japan cost of funding greater than GDP growth

27 Jan 2010. The Aleph Blog.

“The Land of the Setting Sun? David Merkel”

“you don’t want the rate your government finances at to get above the rate of GDP growth. If so, your debt will increase as a fraction of GDP, even if your deficits drop to zero. …

0.2%/yr average growth of nominal GDP?! That stinks. But here is what is worse. The Japanese government finances itself at an average rate of 0.6%. The debt is walking backward on them unless GDP growth improves. No wonder S&P has put Japan on negative outlook.”

Declining capacity for internal borrowing by Japan government

23 Feb 2010. FTUSA p21.

“Japan's debt team taps up Europe for new buyers. Robin Harding, Lindsay Whipp”

“The share of Japan's $9,670bn (pound(s)6,242bn) national debt owned by Japan Post Bank and Japan Post Insurance is in decline despite the postal system devoting ever more of its balance sheet to government bonds. …

Postal savings' share of the government's debt rose from around 6 per cent in 2001 to 20 per cent by 2007, when JP Bank became a separate company, and its JGB holdings were merged with those of private banks in official statistics. …

From March 2008 until the end of 2009, the share of JP Bank's assets invested in government debt rose from 74 per cent to 81 per cent, but its share of the market fell.

Japan Post Insurance has upped its JGB holdings from 61.3 to 65.5 per cent of total assets. However, its share of the market has dropped.

JP Bank and JP Insurance are suffering a structural decline in deposits. Total assets at JP Bank have fallen by 8 per cent since March 2008. Deposits at the bank have fallen for at least five years in a row and 2010 is a key year for deposit redemption. …

Pension funds are starting to pay out more and more as the population ages, reducing their ability to buy JGBs.

The main buyers of JGBs are private Japanese banks and insurance companies. Banks are buying to meet new liquidity rules, because they lack alternatives in deflationary Japan. They also have excess deposits because of a lack of demand for corporate loans.

Meanwhile insurers are buying JGBs to better match liabilities that they will have to mark to market from 2013.

There is a risk that private-sector bank buying could fade, notes one bond salesperson at a domestic brokerage. Banks, which already have “huge profitable” JGB portfolios, could start to take profits and, if companies start investing again as the global economy recovers, that would lead to an outflow in corporate deposits.

Koji Shimamoto, chief strategist at BNP Paribas says: “I think the risk for JGBs will come after 2012 or 2013 because institutional change [at banks and insurers] will have peaked out and - the most essential point - because of Japan's population ageing.””

Japan gross and net, pension obligations

5 Mar 2010.

“Comparisons with Athens' debt do not add up in Tokyo. Mure Dickie”

“Optimists insist that it is wrong to fixate on Japan's gross debt, since in net terms the state only owes the equivalent of slightly more than 100 per cent of GDP. After all, the lower net number reflects the fact that the state has the equivalent of more than Y100,000bn in foreign exchange reserves and also holds a big chunk of its own debt.

It is unclear, however, how much help other state assets would be in extremis. Social security funds, for example, hold well over a third of total assets - but their future obligations are even bigger. Raiding pensions would be catastrophic for public confidence.”

Secondary effects of earthquake on govt debt

23 Mar 2011.

“Japan recovery: state finance woe”

“Reconstruction and investment necessitates a fall in the corporate savings rate, which on UBS calculations stood at 8.4 per cent of GDP in the fourth quarter, close to a multi-decade-year high. Yes, that is a gradual process, and even a steep rise in government bond yields could take several years to work its way into a significantly higher interest-rate bill. But the bottom line is that every yen spent by companies on replacing lost capacity is one not spent on a Japanese government bond.”

China buying JGB

8 Jun 2011.

“China buys record amount of long-term JGBs. Lindsay Whipp”

“China has bought the largest amount of Japanese longer-term bonds and notes since at least 2005, according to official Japanese data, raising speculation that it may be taking a more strategic approach to investing in the JGB market.

Japanese balance of payments figures show that China bought a net Y1,330bn ($16.7bn) of bonds with maturities of over a year, in April. That compares with March’s net purchases of Y234.5bn, the previous record, and marks the seventh consecutive month of buying.

However, the longer-term buying in April was countered with the larger net sale of Y1,470bn in money market instruments – short-dated bills of a year or less – in the sixth straight month of sales. …

However, flows data from Japan’s finance ministry showed only a small part of the picture, analysts warned. The data only track where the transactions were carried out, rather than who owns the bonds. In other words, China is highly likely to be making further Japan-related trades, whether buying or selling, through financial centres such as London, New York and Hong Kong.”