Government debt in the advanced economies with special reference to Japan (2013)

Japan is the country with the highest level of government debt among the advanced economies. Continued large fiscal deficits will push the debt-to-GDP ratio to more than 250% of GDP by the middle of the present decade. Japan’s position is nonetheless not as dramatic as it looks. (1) In net terms (net of government financial assets), debt stands at 135% of GDP. This is still high, but not unprecedentedly so. (2) Government debt in Japan, unlike in the other advanced economies, is not consolidated on an intra-government basis. Intra-government consolidation would reduce the net debt ratio by another 20 percentage points or so. (3) If non-financial assets are taken into account (e.g. fixed assets, land), the government’s net worth is roughly zero. (4) Furthermore, if the government balance sheet is consolidated with the central bank and the broader public-sector, public sector net worth looks even more favourable. (5) Japanese government debt is predominantly owned by residents, predominantly banks. Government moral suasion makes it unlikely that they will refuse to finance the government. (6) Contingent liabilities in terms of future pension- health-related spending are comparatively low in Japan, in spite of relatively adverse demographic trends. (7) Last but not least, Japan is the world’s largest international creditor. Admittedly, if the government fails to significantly reduce the fiscal deficit of 9% of GDP (on a cyclically adjusted basis), government debt will become unsustainable over the medium- to long-term. Nonetheless: the Japanese government’s present financial stock position is not as dire as the headline figures might suggest.

Source: IMF