“Worse than Greece”: Is Japan’s Debt at Breaking Point?

“Worse than Greece”: Is Japan’s Debt at Breaking Point?

across the world a couple of years ago, most governments were understandably anxious about its politically toxic consequences. Perhaps the one exception, however, was Japan, where policymakers were quietly optimistic that some supply side inflation could finally push Japan out of its deflationary funk and perhaps return Japan’s uniquely debt laden economy back to normality. Somewhat unsurprisingly, however, it turns out that normalizing monetary and fiscal policy when your debt’s GDP ratio is over 200% is pretty difficult. And last week, Prime Minister Shagaru Ishaba warned voters that quote, “Japan’s fiscal situation is worse than Greece’s.” Unfortunately for Ishaba, in the past couple of days, things have suddenly got a lot worse after a sharp sell-off in Japanese bonds pushed Japan’s long-term borrowing costs to unprecedented levels. So, in this video, we’re going to have a look at Japan’s efforts to normalize its economy, the looming debt crisis, and what might happen [Music] context. After World War II, Japan experienced decades of rapid economic growth with the Japanese economy growing by an average of 7% every year from 1955 to 1990. However, in the ’90s, Japan suffered from a series of economic shocks in quick succession. After a massive boom in the 80s, in the decade after 1990, residential house prices fell by more than 50%. Commercial property prices fell by something like 85% and Japan’s main stock index, the Nicay 225, fell by about 75%. Japan’s economy entered a period of stagnation with both growth and inflation falling close to zero. In an attempt to stimulate the economy and get it growing again, Japan’s central bank, the Bank of Japan, or BOJ, bought up billions of yen’s worth of government bonds, essentially printing money and giving it to the government to spend. This didn’t really work. And when the Japanese economy took yet another hit after the 2008 financial crisis, the BOJ also started buying up corporate debt, essentially printing money and giving it straight to Japanese companies. In this sense, the BOJ pioneered many of the techniques that Western central banks would go on to use after the 2008 financial crisis and the pandemic. Unfortunately for the BOJ, this still wasn’t enough to get Japan out of its stagflationary funk. And both growth and inflation stuck stubbornly close to zero. While the Japanese government’s debt burden ballooned to more than 240% of GDP, probably the highest in the world. That was until early 2022 when the inflationary shock that swept across the world pushed Japan’s annual inflation rate above 2% for the first time in nearly a decade. Japanese policy makers saw this as an opportunity to essentially bring the Japanese economy back to normality by using this inflationary episode to trigger a mild wage price spiral which would keep inflation persistently above zero. In other words, Japanese policymakers wanted workers to demand higher wages in the face of higher prices, which would mean more spending power for Japanese households and therefore higher prices, etc. Slightly higher inflation could also drive economic growth by encouraging Japanese households to spend money instead of saving it and letting inflation eat away at its real value. And well, this sort of happened. While wages lagged behind inflation in 2022 and 2023, in 2024, the average wage growth for workers at large companies came in at above 5%. The highest since 1991. Japanese policy makers were optimistic that once inflation had become self- sustaining, they could normalize monetary and fiscal policy. The BOJ wouldn’t have to constantly buy government and corporate debt to keep the economy out of deflation. And if inflation and growth were up, the Japanese government would enjoy higher tax revenues and so wouldn’t have to issue as much debt. If Japan could achieve these three things, persistent inflation, the end of quantitive easing, and relatively balanced budgets, its economy would suddenly look a lot more normal. However, it turns out transitioning from a stagflationary economy into a quote unquote normal economy is pretty difficult. For starters, that mild wage price spiral that policy makers were imagining has quickly become more severe. Inflation has stayed above the BOJ’s 2% target since 2022 and has actually risen in recent months to around 4%. Japanese consumers, who are used to stable prices, have reacted furiously at the recent price rises, especially for staple grains like rice, putting pressure on the government to cut its consumption tax. Furthermore, this inflation has forced the BOJ to raise its benchmark interest rate to 0.5%. The highest since 2008. This might not sound too high, but because Japan’s debt pile is so enormous, even a slight increase in interest rates causes a massive increase in servicing costs. Japan now expects to spend something like 32 trillion yen on debt servicing next year, representing about 5% of GDP, more than almost any other country. So, you get the idea. Japan’s attempt to normalize its economy has put massive pressure on the government’s finances, both because the cost of debt servicing has increased and because there’s renewed political pressure to ease the cost of living crisis. And this problem has suddenly started looking particularly acute in the past couple of days after Japan’s bond yield spiked to levels not seen in decades. The yield on both 30 and 40-year Japanese bonds, for instance, is currently over 3%. The highest Japan’s long-term borrowing costs have been since probably the 1980s. So, what happened here? Well, some of it’s a consequence of a similar rise in US bond yields with the yield on both 30 and 40-year treasuries spiking after Moody’s, one of the big credit rating agencies, downgraded America’s credit rating, citing America’s unsustainable debt burden. For complicated reasons, other countries bond yields generally track treasuries, which is why Japan, the UK, and European economies also an increase in long-term borrowing costs at the same time. Some of it was because of a conspicuously weak bond auction a couple of days ago when the Japanese government tried to issue more than 20-year bonds only to find out that no one really wanted to buy them. But perhaps the fundamental reason is that well the market just don’t think Japan can afford any more debt. Japan’s debt pile is already massive. Japanese growth is weak with GDP contracting in the first quarter of this year. And markets just don’t trust the Ishiba, who’s remarkably unpopular at the moment, has the political capital to impose the fiscal discipline required to make good on Japan’s debts. This all presents the Bank of Japan with a difficult dilemma. Does it trust Isha to sort out the fiscal mess? or does it restart buying government debt, easing the pressure on Ishiba, but tacitly admitting that Japan’s economy will probably never return to normality. This would also risk going a spanner into the ongoing trade negotiations with the US given that return to ultra loose monetary policy would probably weaken the yen, something Trump has complained about in the past. All in all, there doesn’t seem to be an easy way out of this fiscal mess, and it looks like bringing Japan’s economy back to normal will be frustratingly difficult.

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When inflation ticked up a few years ago, it brought anxiety to many governments – except for Japan who hoped to use the slightly higher inflation to get out of its zero-growth slump. But, that seems to have backfired, so, in this video, we’re taking a look at the Japanese economy, the debt crisis and what could happen next.

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1 – https://observingjapan.substack.com/p/ishibas-grecian-turn
2 – https://wolfstreet.com/2025/05/20/japans-30-year-and-40-year-bonds-crater-yields-spike-huge-mess-coming-home-to-roost-yen-carry-trade-at-risk/
3 – https://carnegieendowment.org/2010/03/18/japan-s-past-and-u.s.-future-pub-40356
4 – https://www.economicshelp.org/wp-content/uploads/2014/11/japan-government-debt.png
5 – https://tradingeconomics.com/japan/inflation-cpi
6 – https://www.economist.com/asia/2024/07/01/japans-mind-bending-bento-box-economics
7 – https://www.nippon.com/en/japan-data/h02044/
8 – https://www.reuters.com/markets/commodities/japan-release-more-rice-stockpiles-tackle-shortage-rein-prices-2025-05-16/
9 – https://www.imf.org/external/datamapper/ie@FPP/ITA
10 – https://www.marketwatch.com/investing/bond/tmubmusd30y?countrycode=bx
11 – https://www.marketwatch.com/investing/bond/tmbmkgb-30y?countrycode=bx
12 – https://www.bloomberg.com/news/articles/2025-05-20/japan-s-20-year-bond-auction-gets-weakest-demand-since-2012
13 – https://www.reuters.com/business/japans-economy-shrinks-us-tariff-hit-looms-2025-05-16/

00:00 – Introduction
01:27 – Context
03:02 – Japan Tries to Become “Normal”
04:34 – Why “Normal” is Harder Than It Looks
05:51 – The Debt Crisis
07:53 – Sponsored Content