Japan and its Debt-to-GDP ratio
Introduction
How can we expect the propensity to save to be the same in Japan as in Europe or the USA? History matters. I am a Scottish 'war baby', and 80 years later I am still hoarding writing paper. While Europe was evolving the goose-down duvet, Japan was evolving the wooden takamakura pillow. The Japanese temperament, history and laws are all very different from ours in Britain. Japan cannot raise its inflation rate to 2%; we in the UK cannot lower our rate to 2%.
Japanese regulations and saving propensity
From 1945 - 1990 the average Japanese household saved nearly a quarter of its disposable income. (C.f. 18% in France and 20% in Germany. ) For some reason we in Britain favour investing in stocks and shares. The Japanese psyche (and/or government regulatory preference) seems to prefer the simple, low-interest savings account in a simple bank. I quote Takeo Hoshi (2023):
"As early as the mid-1990s, the Japanese government realized that various regulations in financial markets made households hold most of their financial assets in the form of cash and deposits." [8].
There is currently "too much money" in such accounts, and banks offer negative interest to try to drive that money away [8]. Managed funds are not favoured in Japan, neither by the public nor the government. Stock brokers would like the Japanese to gamble on the stock market like people do in UK and USA because that is how they make their money, but they cannot get the public enthusiastic [8]. In the period 1950 - 1990 the social security provision in Japan was weak; workers had to save to provide both pensions and 'security against hard times'. (I learn that there is some regulation in Japan that makes low-interest bank-deposits a favourite place for workers to store the money they have saved for their pension. But I do not know what; perhaps rules about interest rates and tax breaks. From [11], I learn that tax breaks for private savings (maruyū) were introduced in 1963, encouraged household savings.)
The 'Bubble' and the 'Burst'.
From the sixties to the eighties, times were good for Japan. Real Japanese GDP increased fivefold between 1960 and 1990, and with it net household savings increased by the same factor to 45 trillion yen at 1990 [11]. Japan ran a large trade surplus with most developed countries, and in particular with the USA. However, the surging value of the yen eventually depressed sales. In addition, the growth of competition from other Asiatic economies also lowered profitablility. The USA wanted Japan to curb the bubble by raising interest rates, but the BOJ lowered interest rates, trying to "stabilize exchange rates". In 1987 Japanese money supply (M2) was still expanding at 10% p.a. even while inflation dipped to negative values [10]. The BOJ failed to note (in time) the 'overheating' of the economy; and the 'bubble' burst.
The 'bubble-burst' came in December 1989, with the Nikkei 225 dropping 41% in 8 months, from 39,000 to 23,000 by August 1990 [12]. But that sudden decline was followed by a persistent slow delcine for 18 further years till it bottomed at 7,000 in October 2008, having lost 82% of its maximum value. The revival of the Nikkei 255 did not really begin till mid 2013, when the BOJ started large scale purchase of Japanese stocks and shares. Since then it has climbed steadily to a new high at the beginning of 2026.
CPI Inflation
As far as the Japanese themselves are concerned, the Yen has proved to be a very stable currency since 1991. Between 1956 and 1991 the Yen lost more that 80% of its value, but has remained very steady since then [13]. Conventional wisdom is that it is better to have annual inflation of +2%. Not too much higher, and not too much lower. By 1987 the growth of other Asian economies had created over-production and the need to shed workers. However, in the face of competition Japanese firms tended to hold on to their workforce offering security in place of wages. So wages sank. And prices sank.
The BOJ saw persistent negative annual inflation (-0.3%) for 15 years from 1998 - 2013, (and again from 2019 - 2026 according to Ian Webster, [13]). That worried them, as every other country had inflation. So, in 2013 the BOJ instituted a programme of 'Quantitive and Qualitative Monetary Easing', QQE) [14], with the aim of intentionally de-valuing (inflating) the Yen till it achieved the desired 2% inflation rate. They also aimed to lower the risk-aspect of interest rates by underwriting. (Basically, by systematic buying of Japanese government bonds (JGBs) and exchange-traded funds (ETFs) at the rate of some 60 Trillion Yen per annum.).
By the end of 2013 the BoJ had achieved an annual inflation rate of 1.6 %, so in 2014 the board decided to scale up the QQE by some 20% to 80 Trillion Yen per annum. They ended 2014 with an annual inflation of 2.4% [15]. However, the CPI inflation rate again slumped to near zero in 2015 [15]. On the other hand, the economy did start to improve; job vacancies appeared, and wages rose. However, after 15 years of deflation the expectation that prices would remain static had became deeply embedded in the national psyche. Bank deposits placed at the BoJ were charged with a negative interest rate of (-0.1%) from Jan 2016 till March 2024; only reaching +0.75% in Dec 2025. (Presumably in an attempt to drive the saved money into investments.)
Debt:GDP (as %)
In the 1970 Japan had the lowest ratio of Debt:GDP of all the G7 economies; since 2000 it has had the highest ratio. In 2020 (with COVID) debt reached 250% of GDP. It does seem odd that a relatively wealthy country like Japan should run a fiscal deficit (spending more each year than it raises in tax). But it is relevant to note: [a] it has (till recently) enjoyed very low interest rates, and [b] 90% of Japan's government debt is owned by Japanese. The benefit of low interest rates needs no explanation. The fact that most of the Japanese debt is held domestically has two benefits. Institutional Japanese holders are unlikely to attack the Yen in the way that predatory foreign owners can (See Greece in 2011). And the interest paid on the debt is not lost to the country; it could even be viewed as part of GDP.
Diverting Savings to Investment.
From Jan 2016 (till March 2024) deposits placed at the BoJ were charged with a negative interest rate of -0.1%. Presumably this was an attempt to drive the money saved in bank accounts into productive investments. The economy did recover; GDP has maintained a small annual growth from 2013 till 2020 (COVID!). The Silicon Review of 22 Dec 2025 wrote [18]: "The Japanese government is looking to mobilize a portion of the nation's US$ 7 trillion pile of household savings to create fresh demand for its bonds."
The buildup of the 1,324 Trillion Debt.
According to Wikipedia, Japanese debt rose steadily from the bubble-burst of 1990 until COVID: "At the end of March 2025, the general gross debt of the Japanese Government was 1,324 trillion yen, or 234.9% of the country's gross domestic product" [17]. It is now declining. The longer-dated bonds in particular are not selling well; and, as their market price sinks, their apparent 'yield' (or return per annum) rises.
Conclusion.
Japan has struggled to raise its inflation rate to 2% while most other countries have struggled to lower their inflation rate towards 2%. If it ever succeeds, will it have lost something distinctively Japanese?
References:
[1] https://notayesmanseconomics.wordpress.com/2025/12/24/2025-and-all-that-the-economics-version/
[2] https://conversableeconomist.com/2025/12/23/how-does-japan-sustain-such-high-government-debt/
[3] https://worldpopulationreview.com/country-rankings/debt-to-gdp-ratio-by-country
[4] https://fred.stlouisfed.org/series/IRLTLT01JPM156N
[5] https://occidentis.blogspot.com/2014/06/interest-rates_4.html
[6] https://www.statista.com/statistics/661908/japan-consumer-price-index/
[7] https://www.bis.org/review/r240527d.pdf
[8] https://internationalbanker.com/finance/japans-elusive-goal-of-savings-to-investments/
[9] https://www.ifo.de/DocDL/cesifo1_wp8927.pdf
[10] https://en.wikipedia.org/wiki/Japanese_asset_price_bubble
[11] https://www.econstor.eu/bitstream/10419/195770/1/1663195218.pdf
[12] https://en.wikipedia.org/wiki/Nikkei_225
[13] https://www.in2013dollars.com/japan/inflation/1956?amount=100
[14] https://www.boj.or.jp/en/mopo/outline/ref_qqe.htm
[15] https://www.inflationtool.com/rates/japan/historical
[16] https://www.reuters.com/business/finance/why-is-boj-tweaking-its-buying-japanese-government-bonds-2025-06-17/
[17] https://en.wikipedia.org/wiki/National_debt_of_Japan
[18] https://thesiliconreview.com/2025/12/the-silicon-reviewdec-2025japan-eyes-7t-household-savings-bond-demand
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