Japan can watch debt-service costs consume its budget, or suppress rates and risk inflation. Decades of borrowing have eliminated the easy options.

With government debt over 200 percent of Gross Domestic Product (GDP), Japan forged a path that other Western governments, like the United States, have followed. Now, as Japan’s macroeconomic problems become acute, it is no longer just a cautionary tale for Americans, but part of our developing debt crisis, too.  

Bust, Deficits, and Debt Bust, Deficits, and Debt 

In 1990, Japan’s stock market collapsed and its economy tanked. The Bank of Japan pioneered “Quantitative easing,” flooding the financial system with liquidity, but this failed to stimulate lending, borrowing, and GDP growth. With monetary policy seemingly impotent, the government turned to fiscal policy and began running budget deficits. Economists YiLi Chien and Ashley H. Stewart write that “Japan’s general government (which comprises the central and local governments) has consistently run a significant primary fiscal deficit, averaging 5.1 percent of GDP since 1998.”  

These deficits were greater than the rate of economic growth, so government debt grew as a share of GDP. Between 1997 and its peak in 2022, Japan’s government debt grew from 63.7 percent of GDP to 214.8 percent, comfortably the biggest increase among the G7 countries and nearly 60 percent greater than second-placed Italy.

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