How the world’s most indebted country still has international credit

How the world’s most indebted country still has international credit

  • Cristina J Orgaz @cjorgaz
  • BBC News World

3 hours ago

Japanese in front of screen with financial data

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International market confidence allows Japan to offer borrowing of its sovereign debt at low interest rates

At the end of September 2022, Japan was struggling with a number that would send shivers down the spine of any other country in the world but will continue to rise in the future.

The Japanese national debt reached US$9.2 billion (about R$47.7 billion). The value corresponds to 266% of the country’s GDP the highest percentage among the world’s major economies.

In comparison, the debt of the United States was US$31 billion (about R$160.9 billion) in the same period.

However, due to its size as the world’s largest power, this figure represents 98% of America’s GDP.

The reason for Japan’s massive debt is that the country has been increasing domestic spending to keep its economy afloat for decades.

Its citizens and businesses play a fundamental role in economic growth, but are extremely cautious when it comes to consumption. Therefore, the state is often forced to spend money on them.

“Private savings are huge and investment low, leading to chronic slack in demand,” said Takeshi Tashiro, senior foreign researcher at the Peterson Institute for International Economics in the United States. “That in turn requires government stimulus.”

“One of the causes of this problem is Japan’s demographics. Its population is very longlived,” which increases the cost of health care and state social security, he explains. In addition, the pensioners feel very insecure and prefer to continue saving.

“It is estimated that the aging of the population, which perpetuates this situation, will continue for a long time,” adds Tashiro.

But despite this high national debt, international investors continue to trust the country and lend money to Japan every year by buying its debt.

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Most of Japan’s national debt is in the hands of local currency investors, keeping the central bank away from international turmoil.

How it works?

Japan’s national debt began to rise in the early 1990s when its financial and real estate bubble burst with disastrous results.

In 1991, debt was only 39% of GDP. But from then on, the growth rate of the economy began to drop dramatically, reducing government revenue while circumstances forced the government to increase spending.

Public debt exceeded 100% of GDP in the 2000s and had doubled again in 2010.

Japan, the world’s thirdlargest economy, has maintained the path of stimulus, reinforced by events such as the Great Recession of 2008, the earthquake followed by the 2011 tsunami, and more recently the Covid tsunami, in just the last few decades Pandemic in 2020. 2021.

How to fund expenses

To cushion the impact of these events and to maintain annual education, health, and defense budgets, Japan, like almost every country in the world, sells bonds that fund its spending. That is, the country is offering its debt to international markets with the obligation to repay it in full with interest to investors.

Investors then lend their money, especially the more conservative ones, as these bonds are considered a safe place to put money.

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The longevity of the Japanese and their concern to save for the future prompts the Japanese government to invest to boost their economy, leading to a rise in the country’s public debt

“In addition to the profitability offered, bonds from developed countries are very liquid and can easily be used as collateral for loans,” explains Tashiro.

But with a debt level roughly two and a half times the size of its economy, it’s easy to imagine that the Japanese government would struggle to pay that staggering amount.

Experts point out that the reason that led Japan to maintain its sustainable debt over time without defaulting is that the country managed to maintain the profitability of government bonds at very low interest rates, investors paying little and having a high level of market trust.

“There are investors who prefer stability to profitability and therefore invest their accumulated savings in Japan,” economist Shigeto Nagai told AFP.

little interest

“Japan has kept interest rates extremely low. The debt level is very high, but the government pays relatively little interest to its creditors. And it can keep the debt high indefinitely,” says Ken Kuttner, professor of economics at Williams College Massachusetts, in the United States.

Another reason is the fact that most of Japan’s debt is not denominated in foreign currency but in yen, the local currency. This makes their central bank less vulnerable to the turmoil of international markets.

In fact, 90% of the debt is in the hands of Japanese investors.

“There’s not a lot of Japanese debt held by foreigners,” says Kuttner. “Last time I checked it was about 8%. Most of it is in the hands of Japanese financial institutions and the Bank of Japan.”

This makes it possible to “essentially monetize the state deficit,” he said. That is, the Japanese government sells bonds, but they are bought by its own central bank.

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Japanese bonds are attractive to investors looking for stability, even if profitability is low

“According to ‘QE’ policy [de estímulos]The Bank of Japan has been buying large amounts of government debt to keep longterm interest rates low, which is said to help stimulate the economy,” the professor explains.

“Consequently, the government does not have to find private buyers for all debt issued, and the low interest paid on the debt reverts to the government. This is essentially a monetization of the government deficit, which normally causes high inflation, but surprisingly, that hasn’t happened in Japan,” concludes Kuttner.

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The pandemic along with the 2008 recession and 2011 tsunami was one of the factors that prompted the Japanese government to spend more to boost the economy in recent years

While interest rates continue to rise in the rest of the world, they remain low in Japan.

“This is largely due to the deflationary mentality still ingrained among households and private companies, and the high level of policy coordination between the government and the Bank of Japan,” said David Kohl, chief economist at Swiss investment firm Julius Baer.