Source: Japanese Government Data. Excluding fiscal investment and loan program bonds and FBs from outstanding government bonds.
The national debt of the Empire of Japan consists of the money owed by the country’s central government, which is based in Tokyo. The debts of the country’s local governments are not counted as part of the country’s national debt.
Other obligations that aren’t counted include guarantees for the debts of other agencies, pension obligations, and unpaid bills.
According to the IMF, Japan’s national debt to GDP ratio was 236% in 2017, making it the highest national debt in the world when compared to the national income.
The story of Japan’s national debt and how the government manages it is of great interest to economists around the world. This is because the country faced a severe financial crisis in the 1980s and the way the government got out of that troubling period served as a model for the developed countries in the world when the financial crisis of 2008 occured.
Dates in Japan work on a different system to the rest of the world. In this guide, the dates of the Western world shall be used instead of the native Japanese system.
A debt to GDP ratio of 236% may seem high, but it is not the highest that Japan has ever had. During the Second World War, the Empire went to extreme lengths to finance its war effort. Resulting in a public debt to GDP ratio of 260% in 1944.
Despite an already crippling debt, the government pushed even more bonds into the market. They correctly estimated that a post-war currency devaluation and increased inflation would erode the national debt. At the same time, a mercantilist trade policy allowed the government to increase the country’s foreign currency income, which did not erode in value as quickly as the Yen.
Eroding the national debt away with inflation became a classic government strategy that was implemented around the world with varying success.
A financial crisis in the late 1980s and early 1990s can be directly attributed to the government’s inability to soak up the excessive liquidity that was pumped into the economy during the post-war era. Although inflation and large amounts of government financing for development helped to erode the national debt as a percentage of GDP, the excess of capital made loans cheap and created a property price bubble.
The economic environment that the Japanese stoked in the 1980s can be seen repeated in over-supplied property markets in emerging economies such as China and Brazil. When the property crash came, the nation’s banks were left insolvent, carrying overvalued loans on their books that were backed by properties that kept falling in value. This overhang of non-performing loans prevented banks from lending to new enterprises and effectively stopped the economy in its tracks.
From 2001, the Bank of Japan introduced quantitative easing to flood the economy with liquidity, revitalizing commercial banks by swapping their bad loans for government issued bonds. Hence the government’s debt rose. When the 2008 crisis hit, the Bank of Japan just kept rolling with its liquidity plan and the national debt got even higher. This pattern has now been repeated around the world and has become the standard policy to reflate an economy.
The central government’s Ministry of Finance (Zaimu-shō) is tasked with managing Japan’s famously large national debt. Although the level of the debt is noticeably high, the government of Japan does have some advantages over other greatly indebted nations. Most of its debt is held within the country and so the government is unlikely to face problems financing the debt, which is denominated in Yen. The Japanese government can just print it’s way out of financial difficulty because unlike the USA, Germany, France, Greece, or Italy, it owns the country’s central bank, the Bank of Japan.
The Ministry of Finance offers a range of debt instruments to commercial investors. These are collectively known as “Japanese government bonds” (JGBs) even though one of them is actually a “bill.”
The short-term financing of the Japanese government is funded by the sale of one debt instrument type:
Financing Bills are also referred to by the Ministry of Finance as Treasury bills — a name with which international investors will be familiar. As with any typical government Treasury bill, the Financing Bill can have a maturity date of up to one year minus one day. The Ministry issues Treasury bills for 3 months, 6 months and 1 year (minus one day).
These devices do not pay interest, but they are sold at a discount and redeemed at full face value.
The long-term debt instruments that the government issues are:
The Revenue Bond is the classic “benchmark bond.” These bonds pay a fixed interest each year for the life of the instrument. The interest rate that these bonds pay is printed on the certificate. Each year, the interest is calculated, split in half, and then paid out in two six month installments. Revenue bonds are issued with maturities of 2, 5, 10, 20, 30, and 40 years. The government holds auctions of bonds with 2 to 30 year maturities once a month and 40-year bonds are auctioned off quarterly. This is redeemed at full face value on its maturity date.
The inflation-linked bond is often referred to as a JGBi. The face value of this bond increases every year with inflation, but the interest rate on the bond remains the same. However, as the capital amount of the bond increases the actual payment of interest will increase because the fixed interest rate is progressively applied to a larger face value each year. The Japanese government currently only offers the JGBi with a maturity period of 10 years. The inflation rate applied to the bond is calculated as the Ref index for the day by Ref index at the time of issuance.
Beware, if the economy of Japan produces a negative inflation rate (deflation) the face value of the JGBi will fall. The government introduced a floor for these bonds in 2013 to prevent the final face value of the bond being lower than the initial value. However, there are still pre-2013 inflation-linked JGBs out there on the secondary market.
The floating-rate bond pays out twice a year in the same manner as the Revenue Bond. The rate paid each year is the Bank of Japan’s Base Rate plus a percentage, which is printed on the bond. The Ministry of Finance only issues these bonds with a 15 year maturity.
All of the above commercial bonds, and also Treasury bills can only be bought directly from the Ministry of Finance at an auction by registered approved dealers. Other traders and the general public can buy these bonds on the secondary market. The JGB for Retail Investors is an exception to the rule because anyone can buy them directly from the government. These bonds are issued in smaller units than the commercial bonds and have maturities of 3, 5, and 10 years.
Be careful not to confuse Japanese Government Guaranteed Bonds with actual government issued bonds. These are not the same thing. These are bonds issued by government agencies, infrastructure contractors, banks, and industry sponsors. JGGBs are guaranteed by the government of Japan, but they are not actually issued by the government and they don’t count as part of the country’s national debt.
What facts should you know about Japan’s national debt?