Japan's Debt:GDP ratio

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 struggles to raise its inflation rate to 2%; we in the UK struggle to 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 profitability.  The USA wanted Japan to curb the bubble by raising interest rates, but the Bank of Japan (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 decline 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

Separating Inflation and Growth

I am glad to have discovered this 2016 article by Steve Drew, Phil Lewis and Craig McLaren [2],  describing "chain-linking methods used in the U.K. national accounts". I am finally able to clear up some questions that have been bothering me since 2009.  

It is a complex subject, and it may be that they handle the complexities well. But I wish they had written more clearly; their lack of commas, relative pronouns, and examples make their text hard-going for the newcomer. 

        Drew et al. do define their terms, albeit clumsily, and in a jumbled order.

"A current price (CP) estimate records the actual or estimated monetary value for a defined period. The current price estimate is the value expressed in terms of the prices of that period. A time series of CP estimates can be constructed."

(Or, perhaps, put more simply as: "The Current Price estimate of a product is the actual (or estimated) monetary value expressed in terms of the prices of that period. A time series of CP estimates can be constructed."). 

They follow this with a definition of value (which might have been better defined first):

value = volume x price

        For a car factory, volume could be number of cars produced; for a winery, litres of wine. By converting to value the disparate products may be summed. In this way the total productivity of a country can be found year by year, and tabulated in what Drew et al. call 'a time series of Current Price estimates'. (See e.g. Table 1 from [1])

                                Table 1

Year	UK GDP in US$B
1960	73
1961	78
1962	81
1963	87
1964	94
1965	102
1966	109
1967	113
1968	108

However, the question arises, what part of the increase in GDP is real growth, and what part is inflation? If it was just cars or just wine, we could look at the volume figures to see real growth as a factor or  % increase year on year. And, indeed, we could look at the price figures to see inflation in wine price, or inflation in car price. But it is a big job to work out how important wine is to total GDP. 

The method now used in USA, Europe and the UK for GDP, is to tabulate a 'Chained Volume Series' -- thus. 

1. For our year of interest, list every product in the economy with its volume and its price. (We know that the sum of the products of those two quantities give us the GDP.) 
2. List in parallel the data for the previous year.  
3. Instead of multiplying this year's volumes by this year's prices, use the previous year's prices from the adjacent column. 

The GDP so calculated is inflation-proofed, and any increase over the year is due to volume; at least for the 12 month from last year to this.   Why not simply look at volumes? The answer is that we do not know the relative importance of cars and wine, unless we calculate the "values". Or, for another way of seeing this, you cannot sum "wine + cars", only "£ + £". [3]

                                                                        Table 2

Item	Vol. in 2000	Price in 2000	Value in 2000	Vol. in 2001	Price in 2001	Value in 2001	'Volume only GDP' in 2001
Cars	10	100	1,000	10	101	1,010	1,000
Wine	20	1	20	80	1.0	80	80
GDP			1,020			1,090	1, 080

        In Table 2, the right hand column ('Volume-only GDP' in 2001) could be called 'inflation-corrected GDP for 2001. We see that the apparent 6.8%  (1090/1020) increase in 'uncorrected GDP' was partly (1%) due to inflation, and partly (1080/1020 ≣ 5.9%) due to a good wine harvest. 

So far, in this exposition, there is no 'chaining'. So let us look at 2002, or year 2. The question is whether to keep 2000 as base year (year 0) for the next 2 decades, or always use the 'previous year'. The advantage of chaining over indexing to a distant reference year, is explained by the International Monetary Fund [5]: 

"A key recommendation in the 2008 SNA.....is to move away from the traditional national accounts measures “at constant prices”  toward chain-linked measures. Annual chain indices are superior to fixed-base indices, because weights are updated every year to reflect the current economic conditions. Chaining also avoids the need for re-weighting price and volume series when the base year is updated every five or ten years, which usually generates large revisions in the history of price and volume developments." [5]

Table 3, Showing an economy of 3 items through 3 years.

(P0=Prices in year 0, Q= quantity or volume, PxQ =Value in currency units.  C.f. [6].)

	P0	Q0	P0 xQ0	P1	Q1	P1xQ1	P0 xQ1	P2	Q2	P2 xQ2	P0 xQ2	P1 xQ2
Cars	100	10	1000	101	10	1010	1000	102	10	1020	1000	1010
Wine	1.0	20	20	1.0	80	80	80	1.5	20	30	20	20
Paint	1	100	100	2	100	200	100	4	95	380	95	190
GDP 'current'			1120			1290				1430
GDP 'constant'			1120				1180				1115
GDP 'prev. year'							1180					1220

We can see, by comparing P0 with P1, that there is inflation, but we do not know how important the price of paint is to the whole economy.  Uncorrected GDP (shown here as the sum of all the products of P1 x Q1) increase from 1120 to 1290  (which is  a rise of 15%); corrected GDP only rose from 1120 to 1180 (i.e. by +5.4%). It looks like annual inflation of some 10%; growth of 5.4%. (Even though car prices have only gone up 1%, and wine 0%.)

Comparing year 2 with year 1, the uncorrected GDP has risen by a factor of 1430/1290 (i.e. by 1.109 or 10.9% ). But, using P1 prices for both years, we see that GDP corrected for inflation (GDP 'constant p') has fallen 1220/1290, so real GDP fell by a factor of  0.9457, or -5.42%.

Using P0 throughout, we would conclude growth in the first year was from 1120 to 1180 (i.e. growth of 5.36%), and, in the second year, negative growth from 1180 to 1115 (i.e. negative growth of -5.5%) more than cancelling the positive increase the provious year. So, between year 0 and year 2, negative growth 1120 to 1115  (so -0.4%).

Just as we can strip out inflation from real growth by comparing adjacent years using the prices of the earlier year, so we can strip out growth by comparing adjacent years using the quantities from the earlier years (or the later years, or both and take the average) to find an index of pure inflation freed from growth. 

=================

References:

[1]  https://www.macrotrends.net/countries/GBR/united-kingdom/gdp-gross-domestic-product

[2]  https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/methodologies/chainlinkingmethodsusedwithintheuknationalaccounts#chain-linking 

[3]  Note (for the scientifically minded): Volume [in litres] x Price [in GB£ per litre] = Value [in GB£].

[4]  https://researchbriefings.files.parliament.uk/documents/SN04962/SN04962.pdf 

[5]  https://www.imf.org/external/pubs/ft/qna/pdf/2017/chapter8.pdf 

[6]  https://www.dsec.gov.mo/elearning/en/knowledge/124

Suppose car volume remains at 100 but price continues to rise, let us say to £1022/car. 

We could express the value in current (2002) prices as £102,200. 

Or we could express the 2002 value in 2001 prices as £102,200 x 1010/1022=£101,000.

Or we could express it in 2000 prices as £102,200 x 1010/1022 x 1000/1010=£100,000, chaining back to our initial year.