Japan Has World’s Largest Debt Burden: The Surprising Reason Behind It | World News

Tokyo: Japan is in the spotlight again, but not for matcha lattes or cherry blossoms, this time the headlines are about its record debt. Understanding the origins of this situation requires a closer look at the country’s economic history, starting with the collapse of the asset bubble in the late 1980s.

In the late 1980s, the country experienced an unprecedented rise in asset values ​​fueled by easy credit, aggressive lending, and speculative investments. Real estate prices and stock valuations soared, with the Nikkei 225 index tripling between 1985 and 1989.

The expectation of sustainable growth and low interest rates mobilized institutional and individual investors. But in mid-1992 the bubble burst, erasing most of the gains and triggering a long period of economic stagnation.

Skyrocketing asset prices in real estate and stocks collapsed almost overnight, stunning banks, corporations and households. Even as inflation has begun to return in recent years, its legacy continues to influence household and corporate behavior.

Faced with a recession, both individuals and companies prioritized savings and debt repayment over consumption. Tax revenues decreased. Instead of increasing taxes, the government turned to borrowing to finance its activities.

To further stimulate spending and keep borrowing costs low, the Bank of Japan has cut interest rates sharply, even pushing interest rates into negative territory at times. Combined with an aging population and rising pension and health care costs, these measures have created a stimulus cycle that triggers more debt, which in turn reinforces weak growth.

Low domestic interest rates have encouraged investors to seek returns abroad. This led to the emergence of the yen carry trade, a strategy in which investors borrow yen at low cost to invest in high-yielding markets. For years, this inflow of Japanese capital kept global borrowing costs subdued and provided easy liquidity to international markets. Today, with Japanese yields rising, the era of easy carry-trade profits is coming to an end.

Although gross debt to GDP is roughly 250%, Japan’s net debt stands at around 140%, providing a more balanced perspective. Comparatively, the United States’ gross debt is 120% and its net debt is closer to 96%.

Almost 90 percent of Japanese government debt is held domestically, and bond maturities of nine years or longer limit immediate exposure to rising interest rates. Rating agencies continue to view Japan as a safe investment destination, maintaining its A-level ratings.

Japanese investors hold significant foreign assets, including U.S. Treasury bonds, but these are long-term investments rather than speculative bets. As a result, sudden, large-scale sell-offs are unlikely and the move away from extremely low domestic yields is expected to be gradual.

Japan’s massive debt is the product of decades of policy decisions, structural challenges and demographic pressures. The yen has kept borrowing costs low around the world by influencing global markets through carry trading and long-term lending models.

Although the current increase in yields represents a change, the situation is manageable. The country’s approach to debt and investment continues to impact economies far beyond its borders.