When it comes to government debt levels, one nation stands head and shoulders above the rest: Japan.
This chart from HSBC underlines that point.
While Japan’s government debt pile has grown slower than other nations over the past five years as a ratio of GDP, in absolute terms, it’s currently more than double the size of annual economic output – more than 60 percentage points higher than second-most indebted Italy on the chart.
“Government debt has swelled rapidly since the early 1990s, largely attributable to rising social security costs due to the country’s ageing population,” says HSBC.
Although huge both in currency and GDP terms, Japan’s debt pile has, as yet, not translated to a surge in debt repayments for the government, something HSBC says is partially explained by the ongoing monetary policy easing from the Bank of Japan (BoJ), or bond purchases, put simplistically.
“So far, the pressure on government funding has been limited, thanks to the Bank of Japan’s aggressive buying and yield management under its Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control (YCC),” HSBC says.
The BoJ is currently buying enough Japanese government bonds to keep 10-year yields anchored around 0%, helping to depress borrowing costs for the government.
In the 2017 fiscal year, debt servicing made up 24.1% of total Japanese government expenditures, including 9.4% on interest repayments.
If government bond yields were higher than they currently are, the increase in debt servicing would create major fiscal troubles for the government.
That’s an ever-present risk, but one that has not yet materialised as yet.
The Japanese government plans to lift its national sales tax from 8% to 10% in October next year, something it forecasts will bring its primary budget balance back to surplus in 2025.
Whether that eventuates or not, regardless, Japan’s already massive debt pile looks set to get even larger for some time yet.