Japan’s public debt has been above 100% of GDP for almost 25 years without causing a crisis. But can that continue?
Japan is the canary in this coal-mine. In the 1980s its booming economy struck fear in the world. After the bubble burst in the 1990s, public debt ballooned and deflation set in. Many in the West said Japan’s debt was unsustainable and the Bank of Japan should do more to boost inflation. In 2013 the’s governor, Kuroda Haruhiko, embarked on dramatic monetary easing. The debt hovered around 230% of. A strange thing ensued: no fiscal crisis struck, nor did inflation come near the 2% target.
Debt has not turned out to be such a problem. “What we thought used to be fiscal limits are no longer fiscal limits,” argues Adam Posen, of the Peterson Institute for International Economics think-tank. “[Japan] has forced people to confront reality: the interest rate can stay below the growth rate for very long periods.” The public debt has been above 100% ofIt helps that the country borrows in its own currency, the government has big financial assets and theholds a big share of the debt.
Once inflation expectations are anchored around zero, raising them is hard. Moreover wages have not risen much, despite a tight labour market. Unions prefer stability of employment to wage rises, reckons Nakaso Hiroshi, a former deputy governor of the. Companies have gradually taken on more “non-regular” workers on part-time contracts; they account for 40% of the labour force, twice as much as in 1990.
Overall growth has remained sluggish, but growth per head has recently been comparable with others in the. Unemployment has been minimal, longevity has increased and inequality has stayed relatively low. “Maybe Western economists who were so critical of Japan circa 2000, myself included, should go to Tokyo and apologise to the emperor,” Paul Krugman, an economist, tweeted in 2020. “Not that they did great; but we did much worse.
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