Japan’s debt, now twice as much as its economy, imposes difficult decisions

Tokyo – Japan, which has the largest government debt among major economies, is finding it difficult to spend as before.

The public spending funded by debt, made possible by low interest rates, has long been a way to face the country’s problems. Farmers in difficulty and deponent rural areas received generous payments from the central government. Help during Covid-19 pandemic has become new defense spending and subsidies to help consumers face inflation.

The expense continued even with the growing need for social security financing for the growing number of elderly people in Japan. Government debt has shot for almost 9 trillion dollars – more than double the size of the economy.

Now, before a highly disputed summer election, the Japan ruling party faces pressure to further increase the debt. Small companies harmed by US tariffs are asking for government help, and families pressured by price increases require tax reduction.

But as the Japan Bank moves away from negative interest rates that for years facilitated government loan, spending limits are more evident.

Recently, the Japanese government’s title market has reflected concerns about the country’s fiscal health. Long -term securities income, an indicative of investors’ confidence in government’s ability to pay their debts, rose to record levels at one time last week. And the weaker demand than expected in a 40-year-old title auction on Wednesday kept investors apprehensive.

Japan Prime Minister Shigero Ishiba warned of a recent government meeting about the higher interest rates and even compared Japan’s budgetary situation to Greece, which plunged into a debt crisis in 2009.

Most economists and authorities agree that Japan is not moving to imminent financial collapse. Most of the Japanese debt is detained by Banco do Japan and domestic financial institutions, which means that there is a low risk that money is suddenly withdrawn from the country. But doubts increase how long the country can keep its current spending path.

Generally, excessive debts can bring economies to a dangerous cycle. Title holders are increasingly apprehensive about the government’s ability to pay their obligations, which raises interest rates. The increase in rates then reverberates the economy, making it difficult for the country’s ability to take loans.

In Japan, “yellow lights are flashing, and at any time any of them can turn red,” said Koji Yano, former administrative minister of the Japan Ministry of Finance. The risk of higher loan costs is real, he said, he believes that Japan’s debt is “significant risk”, as happened recently with US credit classification.

An election in the Japan High House in July will test Ishiba Liberal Democratic Party, which has practically controlled power in Japan for seven decades. Party dominance in recent years have said some analysts, it can be attributed in part to their ability to use spending to contain part of the populist opposition seen in other advanced democracies.

Rupture possibilities have existed for a long time. Aging populations press social security budgets, and the economies of rural areas are declining. At the same time, pensions remain funded, and subsidies flow from the national government to almost all smaller municipalities in Japan to support local industries and help maintain roads and schools.

“There has been a long time commitment to a uniform standard of service provision across the country and assuming the costs associated with this,” said Tobias Harris, founder of Japan Foresight, a political risk consultancy. This kind of policy, he said, “helped dissipate discontent.”

More recently, Japan began to experience, on a small scale, some populist tremors. Over the past three years, a resumption of inflation after decades of stagnation has squeezed Japanese consumers, especially the share of non -regular workers whose salaries are behind those of permanent employees.

In contrast to some parts of Europe and North America, where populists tend to win with rural support, “Japanese populism is another urban phenomenon,” said Harris. Among some white collar and non -regular workers, “there is a sense of revolt against portfolio spending when they generate fiscal surpluses and deal with their own quality of life issues,” he said.

Recently, much of this public discontent has become anger directed at those who try to contain Japan’s deficits.

Last year, protesters gathered in front of the Ministry of Finance building in the Tokyo Center. The demonstrations, which sometimes attract about 1,000 people, are notable in a country that is not accustomed to major public demonstrations of dissatisfaction. His posters require the removal of national taxes on the consumption and dismantling of the Ministry of Finance, an institution seen for a long time as strength within Japan that tries to impose discipline on spending.

Before the election, several opposition parties presented plans to reverse taxes that were increased in 2019 to reduce Japan’s deficits.

For years, the cost of service of Japan’s enormous debt was kept manageable, thank you in part to the Japanese government’s large -scale purchase by the Bank of Japan. Since last year, however, the Japan’s Central Bank has reduced its purchases, and the poor demand from the private sector has led to the income of these long -term titles to shoot.

Ishiba declared against the reduction of consumption tax. But within his party, he faces opposition from a faction of tax expansionists who argue that government deficits are largely irrelevant to nations that can essentially be directly funded through their central banks.

Sanae Takaichi, a policy that narrowly lost to Ishiba in the party’s leading dispute in September, asked the Democratic Liberal Party to present his own tax -cut proposal. She said that Ishiba was essentially giving up the election by refusing to compete with a proposal to reduce consumption taxes.

In the current environment, talking about reducing taxes worries Yano, the former employee of the Ministry of Finance.

With Japan’s debt/GDP ratio over 200% in the last five years, creditors will reach a point where they will say “enough,” said Yano. “It’s like a stew getting hot and starting to boil. Interest rates will trigger,” he said.

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