At Extreme Investor Network, we pride ourselves on providing unique and valuable insights into the world of finance and investing. Today, we want to discuss how Japan has been uniquely helped by the cost-of-living crisis and what this means for its credit standing.
Japan, along with Greece, is one of the few sovereigns that have actually benefited from high inflation in recent years. This unexpected phenomenon has actually helped to lower Japan’s elevated debt ratios, despite previous debt-reduction strategies proving less effective. With low-interest rates and long-maturity debt structures, Japan has found itself in a more favorable position for borrowing, allowing for higher borrowing rates without significant negative repercussions.
One key factor to Japan’s debt sustainability is the low net interest payments relative to government revenue. At just 0.5% in 2023, this figure is projected to rise gradually but is still modest compared to other countries. Additionally, Japan’s debt is primarily held domestically and denominated in yen, with a significant portion monetized by the Bank of Japan. This means that the actual rateable debt due to the private sector is lower than the gross debt ratio would suggest.
As the world’s largest creditor nation, Japan also boasts significant government financial assets relative to its GDP, further adding to its debt-sustainability picture. This unique combination of factors has allowed Japan to navigate its high debt ratios in a more stable manner than one might expect.
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By Dennis Shen, Senior Director in Sovereign and Public Sector ratings at Scope Ratings GmbH, and primary analyst on Japan’s sovereign credit rating, with contribution from Keith Mullin, senior writer at Scope.
