IS DEBT/GDP RATIO A RELIABLE INDICATOR OF A COUNTRY’S ECONOMIC HEALTH?

 Part 1:Why is Japan able to sustain a Debt/GDP Ratio of 260% without economic collapse or significant devaluation of the Yen?

The reasons for Japan’s ability to sustain a Debt-to-GDP ratio of around 260% without triggering an economic collapse or a significant devaluation of the Japanese Yen (JPY) are complex but also instructive.  It illustrates why a country’s Debt/GDP Ratio may not be a reliable indicator of its economic health.  Below is a structured and concise explanation with supporting statistics.

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1. Domestic Ownership of Government Debt

• Over 90% of Japan’s government debt is held domestically, mainly by:
• Bank of Japan (BoJ) – holding ~53% of all JGBs as of 2024.
• Japanese banks, insurance companies, and pension funds.
• Implication: Japan is less exposed to foreign capital flight or speculative attacks on its debt or currency, unlike emerging economies.

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2. Monetary Sovereignty

• Japan issues debt in its own currency — the Japanese Yen.
• The BoJ acts as a lender of last resort and can purchase government bonds directly or in secondary markets (as seen in Quantitative Easing).
• As long as the BoJ is willing to absorb debt and inflation is controlled, default risk is minimal.

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3. Deflationary Pressure and Low Inflation

• Japan has battled deflation and low inflation for decades. Core inflation only began rising post-COVID but remains modest:
• Core CPI YoY (April 2024): ~2.2%, near BoJ's 2% target.
• Implication: BoJ can maintain low rates and finance deficits without stoking runaway inflation.

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4. Ultra-Low Interest Rates

• Japan has had near-zero or negative nominal interest rates since the late 1990s.
• 10-year JGB yield is ~1.1% (June 2025) despite high debt.
• Debt servicing cost is contained:
• Japan’s interest payments/GDP ratio is below 1%, despite high nominal debt.

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5. High National Savings Rate

• Japan maintains a high private and institutional savings rate:
• Household savings rate (2024): ~8–9%, compared to <5% in the U.S.
• Ample domestic capital supports bond issuance without depending on foreign investors.

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6. Current Account Surplus

• Japan runs consistent current account surpluses (2023: ~¥21 trillion, ~3.5% of GDP).
• Reflects strong export base and investment income from overseas.
• Implication: Sustained demand for Yen and Japanese assets stabilizes the currency.

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7. Institutional Credibility

• BoJ, Ministry of Finance, and Japan’s political institutions have credibility in managing fiscal and monetary policy.
• Markets believe that Japan has the political and financial capacity to manage its debt over the long term, despite demographic challenges.

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8. Yen as a Safe-Haven Currency

• In times of global uncertainty, the JPY appreciates (e.g., during global recessions), not depreciates.
• Reflects investor trust in Japan’s financial stability.

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Conclusion

Japan’s high Debt/GDP ratio (~260%) has not led to collapse or currency devaluation due to:

Factor	Impact
Domestic debt ownership	Low external pressure
Monetary sovereignty	BoJ can monetize debt
Deflationary environment	Permits low rates without inflation
Ultra-low interest rates	Contained debt servicing costs
High domestic savings	Reliable funding base
Current account surplus	Supports currency stability
Institutional trust	Enhances investor confidence
Safe-haven status of JPY	Buffers against global shocks

However, risks remain, especially from demographics, rising interest rates, and eventual BoJ exit from QE. But for now, Japan’s unique macroeconomic structure allows it to manage such high public debt levels sustainably.