The financial world is changing, and a country's debt problem is enough to cause global concern. Looking back last year, when the UK implemented controversial tax cuts that unexpectedly pushed government bond prices to their highest levels since the financial crisis, followed by double downgrades from S&P and Fitch, the UK economy was not spectacular.
Now, our eyes turn to the more serious situation. Britain may be just the tip of the iceberg on debt, with Japan in the main focus. The International Monetary Fund predicts that at the end of 2022, Japan's debt will reach 1270.499 trillion yen, equivalent to 260% of its GDP, setting a record for seven consecutive years. The numbers are staggering, and speculation has come as to whether Japan will become the next economy to downgrade its sovereign credit rating after the United States.
Krisjanis Krustins, head of sovereign ratings for Fitch Asia Pacific, made it clear in an email to the media that Japan's high debt has become a major weakness in its sovereign credit rating. Meanwhile, Shinichiro Kobayashi, chief economist at MUFG Financial Group, also warned that upward pressure on government bonds could push 10-year yields above 1% if talk of a downgrade in Japan's sovereign credit rating continues to spread. A 1% rise in the yield of 10-year government bonds will lead to a 3.6 trillion yen increase in debt service payments in fiscal 2026, according to Japan's Ministry of Finance.
Japan's debt problem has formed a "debt bomb" hanging overhead. The IMF estimates that Japan's debt-to-GDP ratio has exceeded 260 percent, well above the highest level among developed countries. At the same time, the Japanese government continues to increase spending, and Prime Minister Fumio Kishida plans to increase defense spending and childcare budgets, which will further exacerbate the country's fiscal pressure. The Kishida government also plans to issue large-scale green transition bonds to promote sustainable development, but this will also increase the debt burden.
However, the Japanese government still seems to be relatively optimistic, with a balance of payments expected over the next few years. However, with rising borrowing costs, there is still uncertainty about whether this goal can be successfully achieved. In addition, the Bank of Japan's ultra-loose monetary policy has also come into focus, and while this policy has reduced borrowing costs, it has also left the central bank holding a large amount of sovereign debt, and the inevitable monetization risk is also worrying.
However, compared to Japan's debt problems, some factors seem to be restraining the explosion of this "ticking time bomb". Japanese companies hold large amounts of cash, reducing the possibility of large-scale borrowing; Most government bonds are held domestically, extending the average maturity of debt; At the same time, Japan's current account surplus also provides some stability. These factors have mitigated the market's concerns somewhat, but there are also concerns that as economic conditions change, it is still unknown when this "time bomb" will explode.
In any case, Japan's debt problem remains risky. The IMF predicts that by the end of fiscal 2022, Japan's total government debt will reach nearly 247% of GDP, ranking first among investment-grade sovereigns. Against the backdrop of an aging population and a shrinking workforce, Japan's economic growth prospects are not optimistic, which also poses a challenge to economic stability.
Overall, Japan's debt problem is far from solvable. The Japanese government needs to develop a credible fiscal consolidation strategy while raising productivity to stabilize economic growth and reduce debt pressures. Although Japan's debt has not had a significant impact on the economy for the time being, risks are still building up and alarm bells are ringing.