Why doesn't Japan default?

At the end of September last year, Japan was so in debt that you would be surprised to hear the amount of debt and the good thing is that this debt burden will not stop here but will continue to increase in the future.

Japan's total debt has reached US$9.2 trillion, representing 266% of its GDP. This amount of debt is the highest among the world's major economies. For example, if we look at the amount of debt of the US compared to Japan, it is $31 trillion, but this amount is only 98% of the total GDP of the US.

What is the reason for such a large volume of loans?

The journey to reach such a large amount of debt is not a few years, but it has taken many decades to increase the debt burden in the struggle to keep the country's economy running and break even. Businesses, which play a key role in Japan's civic and economic development, are reluctant to borrow, while the state often forces them to spend.

Takeshi Tashiro, a non-resident senior fellow at the Peterson Institute for International Economics, says, "People save a lot on their own, but by comparison, they don't often invest in the market."

According to him, one of the main reasons for this problem is Japan's aging population, which increases public spending on social security and health services. Most of Japan's population faces a lot of uncertainty about their future after retirement and therefore prefers personal savings.

However, despite this large volume of loans, what is surprising is that international investors trust Japan to invest.

Explanation of this large volume loan.

Japan's debt burden began to rise in the early 1990s when its financial and real estate systems burst like a bubble with disastrous results. And at the same time, Japan's debt ratio was only 39 percent of its GDP.

Due to this situation, the government revenue decreased while, on the other hand, the expenses started to increase. Within a few years, by the year 2000, Japan's debt burden had risen to 100 percent of its GDP, which doubled in 2010.

The world's third-largest economy has continued to grow at a rate that has been affected by the 2008 global recession, the 2011 Japan earthquake and tsunami, and, most recently, the coronavirus pandemic.

Like the rest of the world, Japan sells bonds to cushion the impact of these events and manages its finances to maintain annual budgets for areas such as education, health, and defense. In other words, Japan sells its debt on the international markets in the form of bonds with the promise that it will return not only all of the investor's money but also a part of it.

Stable and attractive.

After this guarantee from Japan, investors put their money there, especially very conservative global investors who, although the returns are low, the principal is still very safe. Regarding the interest of investors in Japan, Tashiro adds that 'bonds offered by developed countries (credit institutions) can easily be used as collateral for loans (so they are safe investments). Not considered)'.

However, if the size of the debt is almost two and a half times the size of the overall economy of the country, then it is not difficult to imagine that the government will have a hard time paying this huge amount.

According to experts, the reason why the country did not default despite this growing volume of debt is that Japan keeps the yield on government bonds very low, but on the other hand, it is very confident and confident in investment. . . Of course. Market. Goes

Economist Shi Nagai told the AFP news agency that "there are some investors who prefer the security and stability of investments to high returns." And they choose Japan to secure their additional savings.

Low salaries.

Ken Kutner, an economics professor at Williams College in Massachusetts, says that Japan has kept interest rates on loans extremely low. Despite high debt levels, the government pays relatively low interest to its borrowers. And this strategy can sustain high debt indefinitely. It is important to note that most of Japan's debt is not in foreign currency, but in Japan's currency, the yen.

Professor Ken Kuttner says the advantage of holding debt in its currency is that Japan's central bank is less exposed to occasional fluctuations in international markets. 90 percent of Japan's outstanding debt has been bought by investors.

Professor Kuttner says that most of Japan's debt is not held by foreigners, adding that the last time he checked it was around 8 percent. Most of it is held by Japanese financial institutions and the Bank of Japan. He says that this move reduces the government deficit. So, simply put, when the Japanese government sells bonds, its central bank buys them.

Under this policy, the Bank of Japan is buying large amounts of government debt to keep long-term interest rates low, which helps keep the economy afloat.

"As a result, the government does not have to find private sector investors for all the debt it issues, and the interest paid on the bonds goes back to the government via the central bank," explained Professor Kuttner.

It’s about monetizing government deficits, which usually drives any economy into hyperinflation, but Japan hasn't seen this happen while the rest of the world continues to raise interest rates. So the interest rate in Japan is low.