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

Bank Capitalization

“If the banks relinquish risk to the state, they must also relinquish interest in the same proportion.” [1]

Following the banking crisis of 2007 – 9 I read avidly into the question of Debt, Credit and Money Supply. I am particularly indebted to Tony Weekes & Sue Holden [2], Michael Rowbotham [3], and Richard Werner [4] for their clear expositions of the manner in which a very large fraction of our ‘money’ is generated as credit, and its corresponding debt. Their clarity triggered a train of thought in which I re-designed the whole banking system on a more logical and less pernicious basis. Let me explain.

When the owner of a business accumulates more capital than he can usefully employ, he is willing to lend it to friends to enable them to build or acquire plant and the means of producing goods and wealth. The borrower is willing to offer, and (depending on his religion) the lender is willing to accept, a small and regular fee proportional to the outstanding value of the loan, i.e. 'interest'. In a free market where there are numerous independent lenders and borrowers, the level of interest should indicate the real value of the loaned capital. Banks arise as clearing houses to link depositors and borrowers.

Banks are keen to lend at interest, for that is the way they make much of their profit. It soon became clear to banks that (in times of peace and stability) they could lend more money than they strictly owned, for the chance of all the depositors demanding repayment simultaneously was very small. As long as their borrowers eventually paid back all the borrowed money (or forfeited equivalent collateral) they could lend out their capital 5 times over, or 10 or 100 times. Lord Turner suggests [5] that banks should be allowed to lend 5 times as much money as they own, the Swiss bankers suggest 14 times; the risk-takers of Wall Street and the City of London may have dared to go to 30 times, but that seems to have been too far. (I am talking of ratios of capital to total lending of 20%, 7% and 3.3% respectively.) It does seem crazy that there is as yet no agreed ratio of total bank assets to capital held, and no mechanism of insisting that it is adhered to. The old mechanism was to let the over-extended banks fail, and then lock up the board of directors for debt [6]. That worked well enough to inculcate a generation or two of prudent bankers; but it created hardship for thousands of innocent depositors, and governments now-a-days step in and supply the missing money, with the consequence that bankers have become progressively less prudent.

It could be argued that the money that banks lend over and above their own capital, the debt-based money (or credit-based money), is not in any sense the banks’ money, and the interest on it should therefore not be their interest. I am going to argue that it could instead be regarded as a state asset. This is especially reasonable when it is ultimately the state that underwrites the bad debts. Under the present system it can be argued that when a bank makes a loan it takes a risk, and that risk gives it a right to the profit which is the interest; the bigger the risk the higher the interest. But it is the state that ultimately takes the risk. If the banks relinquish the risk to the state, they must also relinquish the interest. On this principle, banks would only keep the interest they earn on the capital they hold; interest they earn on their lending of debt-money must be handed to the treasury. On this basis there would be much less incentive for the banks to over-extend. They would still earn fees on the contracts they draw up; their income would consist of fee income plus interest on their lent capital, but it would not include interest on money they do not own –– which is the current anomalous position.

This rationalization effectively takes from banks the power of generating money and passes it to the government. The banks would be the brokers by which the treasurer generates debt. Fee income suffices for doctors and lawyers, so why not bankers?

Pursuing the argument further we can consider bad debts of two types: [a] when the debt is totally written off, and [b] when there is collateral. For clarity let us suppose that the bank that issued the loan is operating a ratio of capital to total assets of 10%. In case [a] the bank would lose its 10% portion of the loan, while the state loses its 90% portion. The bank would also lose its brokerage fee, as a punitive incentive towards prudent lending. In the case where there is collateral (type [b]), the collateral would revert to bank and government in the ratio 10:90; but the bank would again lose their brokerage fee as a punishment for arranging a ‘bad’ debt. (Or the collateral could revert wholly to the government with the bank being paid its lost capital minus its forfeited brokerage fee).

Note that a ‘bad’ debt with collateral is hardly a bad debt, for the lending bank can end with a more valuable real asset than the virtual debt they created in the first place. They lend money of which they own as little as 10% or even 3%, in exchange for the title-deeds of a real property worth 100%; so of course they are perfectly content to foreclose! This situation can lead to what is called ‘predatory lending’ whereby banks deliberately lend to someone who cannot easily pay back the loan, and where the object is to acquire the collateral; for example, the selling of ‘sub-prime mortgages’. This destructive practice is possible under the present laissez faire system; and indeed it is encouraged by the system, in so far as banks are encouraged to make profit. The cynical onlooker can shrug and say “We cannot stop stupid people signing stupid contacts”. But it is repugnant to the average citizen to see clever people taking money off simpler people in this way; or in any other of the manifold ways currently permitted, practiced, and encouraged by our corrosive financial system. The argument developed above would largely eliminate the problem of predatory lending.

How might this reform of the financial sector be implemented? It would be as simple as the Inland Revenue taxing all lending institution on their interest-income at a rate of not 20% nor 40% nor 50% but in proportion to their capitalization ratio; so at 97% if they are capitalized at 3%, and at 99% if they operate at 1% capitalization. This might seem a very high tax rate, but as argued above, the portion of the interest that I propose to tax in no way belongs to the banks, and letting them keep it seems even more anomalous than claiming it for the Inland Revenue.

References:
[1]  This idea stems from my post of 2011/11/ Debt-and-banks; it was also deployed (2014/8/12) on my IanWest2 blog: "Debt-Money, and the Banking system".
[2]  The Friend, 27 May & 3 June, 2011.
[3] http://www.freewebs.com/whosemoney/gripofdeathchapter1.htm.
[4] http://www.youtube.com/watch?v=wDHSUgA29L
[5]  https://www.theguardian.com/business/blog/2011/oct/12/financial-policy-committee-bankofenglandgovernor
[6]  Overend, Gurney and Co. crashed in 1866, City of Glasgow in 1878.

What is Wrong with Macroeconomics

Macro Mess

     People complain that macroeconomics is a confused mess. It is said that macroeconomists disagree among themselves, that the government is pursuing the wrong policies, that the opposition is not mounting an effective opposition. 

     Diane Coyle in 2012 put the case in a well argued lecture (1), and again in a shorter, less formal, way in a passionate blog (2). Jonathan Portes, in his rebuttal blog (3), summarizes Coyle’s case succinctly as:  

a) "although macroeconomists will insist that there are known scientific facts, they do not appear to agree on what these are”,

b)" the discussion among macroeconomists is so shouty”,

c) "all economists need to do far, far better at explaining their work to the general public”.  

Portes partly rebutted each charge, but in doing so seems to concede each, in large part. 

     That was in 2012; but the argument persists. Last month ‘Unlearning Economics’ (4) weighed in against macroeconomists, and last week Simon Wren-Lewis rushed to his own defence in Mainly Macro (5). But now the argument brings in the extra dimension of politics. Both these bloggers assume ‘progressive’ means ‘distributing downwards the benefits of labour’, and is ‘good’, while ‘regressive’ means ‘reinforcing the power of capital’ and  is ‘bad’. 

     It seems rather pompous of me to join this learned debate, but I have a point or two of my own that I want to make. In my own field of expertise I have seen intellectual tribalism, and well understand a reluctance to grapple properly with alternative ways of rationalising the data. “Intellectuals”, my illustrious colleague often said, “seldom  concede; but they do eventually die”. Natural scientists can usually (in time) be shamed into testing their theories against data; arguments can only persist if both theories are able to rationalise the facts. Does this hard filter operate adequately in macroeconomics?

     However, much of the argument is occurring at levels less rational than the purely academic; between politicians, business men, media commentators, bloggers and the average voter. There are hidden agendas, and consequent confusion, not only about the means, but about the objectives of government policy. Are we trying to increase GDP, or actually trying to reduce taxes; trying to decrease unemployment, or secretly trying to increase it (to bring down costs)? Are we seriously trying to bring down the cost of housing when we ourselves have houses and are getting rather rich thereby, or are we trying to increase profit margins in the industry? Are we simply trying to win an election?  Even phrases like ‘fair taxation’ sow confusion, for some will think it means making the relative burden equal across the spectrum of wealth, while others may think it means we all pay the same absolute amount, like the 'poll tax'. 

     

     It alarms the laymen when they see professors of economics disagreeing (6) and calling each other idiots (7).  It is fair to say that the subject matter of the discipline is complex. But most cutting-edge academic work is complex, and effectively closed to the layman. Macroeconomics, however, is additionally hampered by a traditionally cryptic exposition. Keynes was obviously very clever, which enabled him to conceive the most convoluted and arcane pronouncements (8). Imagine the thrill of finding that your academic competitors do not see the relevance of IS-LM. You will need to explain it! (9), but not clearly enough to be understood; you do not mention what I,S,L and M signify, do not explain that the graph is rotated 90º and uses jumbled axes. (c.f. wikipedia, and https://www.youtube.com/watch?v=mTr2PVbbpxg). 

     Yet there is a simplicity in macroeconomics, as in most things, if you have a mind simple enough to see it. Suppose government wants businesses to produce more goods and employ more men, so that more people have more money and buy more goods. It urges the Bank to lowers interest rates. The people with money buy, those without money borrow and buy. The businesses borrow and build, take on workers, who in turn can now buy goods. Success! But what if interest rates are already near zero? And still people are not buying. (There is clearly no requirement for cash, no point in building factories, no confidence in the near future.) What does 'Marcoeconomics’ suggest? "Fiscal loosening”, says Krugman; but does he mean increasing government spending, or lowering taxes to leave more money in the people’s pockets, both of which increase public debt? (See Chick and Pettifor, 10). 

Now here comes the real problem. What does government do but cut Government spending, and flood the banks with ‘quantitative easing’. (Hadn’t we just established that it was not money we were short of but ‘demand’, and confidence?) The rich get richer, and the poor get poorer, and there is barely a flicker of a recovery. The bosses can invest in new plant! — but there is no point, as there are no customers, no demand.

It is not so much that ‘Macro got it wrong’ as ‘Macro got ignored’. But Macro did get it wrong, twice. It failed to get its point across to those who would have heeded. And in my opinion cutting taxes is not remotely as effective as increasing taxes and increasing government spending; it is merely easier. (See my “Tax and Spend”, 11).  There was no need to scare the public by increasing public debt; and therefore no point in advocating it. Crikey! 

References:

(1) https://www.bnc.ox.ac.uk/downloads/news/tanner_lecture_2012_text.pdf

(2) http://www.enlightenmenteconomics.com/blog/index.php/2012/06/a-macroeconomist-tells-me-off/

(3) http://www.niesr.ac.uk/blog/macroeconomics-what-it-good-response-diane-coyle#.WNkH0GU0mdE

(4) https://medium.com/@UnlearningEcon/no-criticising-economics-is-not-regressive-43e114777429#.iwfjl01sl

(5) https://mainlymacro.blogspot.co.uk/2017/03/on-criticising-existence-of-mainstream.html

(6) https://krugman.blogs.nytimes.com/2016/12/24/dont-blame-macroeconomics-wonkish-and-petty/?_r=0

(7) https://www.forbes.com/sites/timworstall/2016/12/25/paul-krugman-gets-his-recessionary-macroeconomics-wrong-again/#5cc30754701e

(8) http://occidentis.blogspot.co.uk/2014/06/keynes1.html

(9) https://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/

(10) http://www.debtonation.org/wp-content/uploads/2010/06/Fiscal-Consolidation1.pdf

(11) http://occidentis.blogspot.co.uk/2016/07/tax-and-spend.html