Chapter 2 2.5

Fiscal Sustainability Metrics

Key metrics for assessing Japan's fiscal sustainability and debt crisis risk

Fiscal Sustainability Metrics

1. Debt-to-GDP Ratio (Multiple Methodologies)

Japan’s debt-to-GDP ratio varies significantly depending on measurement methodology:

📊 Debt-to-GDP Calculation Methods

MOF Official Figures (as of 2025-06-01):

  • JGB Only / GDP: 192.7% (¥1189T / ¥617T)
  • Total Central Gov Debt / GDP: 215.9% (¥1332T / ¥617T)

IMF General Government Gross Debt: 241-264%

  • Includes broader liabilities beyond central government bonds
  • Includes local government debt, pension obligations
  • Uses different GDP measurement conventions

Sources: MOF Government Debt Statistics (mof_government_debt), Cabinet Office National Accounts via e-Stat (estat_dashboard_data), IMF World Economic Outlook October 2024

Data calculated: October 26, 2025

International comparison (IMF methodology):

💡 Key Observations:

  • Japan's Divergence: Japan's debt-to-GDP ratio has grown steadily since 2000, diverging sharply from other developed nations
  • Greece's Crisis: Greece peaked at 206% in 2020 during the sovereign debt crisis, but has since declined to 171%
  • Post-2008 Jump: All countries show sharp increases after the 2008 financial crisis and 2020 COVID pandemic
  • Germany's Discipline: Germany maintained fiscal discipline, keeping debt below 70% despite crisis periods
  • Data Source: IMF World Economic Outlook (October 2024), General Government Gross Debt methodology

Japan has the highest debt-to-GDP ratio in the developed world regardless of methodology.

💡 Gross vs Net Debt: A Critical Distinction

The 215.9% figure shown above is gross debt—total government liabilities without accounting for government-owned assets.

When accounting for ¥660.7T in government financial assets (GPIF, FX reserves, state enterprises):

  • Net Debt (MOF): 106.7% of GDP
  • Net Debt (IMF): 125.6% of GDP

This brings Japan's debt burden closer to France (gross 112%, net ~95%) and Italy (gross 137%, net ~125%)—still high, but far less alarming than the gross figure suggests.

See:

For a detailed analysis of Japan’s primary balance—the core metric used to assess fiscal sustainability—see Section 2.6: Primary Balance.

2. Debt Service Ratio

\[\begin{align} \text{Debt Service Ratio} &= \frac{\text{Debt Servicing Costs}}{\text{Total Budget}} \\ &= \frac{¥25.2T}{¥112.6T} \\ &= 22.4\% \end{align}\]

Nearly one-quarter of every yen in the budget goes to servicing debt.

Threshold analysis:

  • <15%: Sustainable
  • 15-25%: Elevated (Japan’s current state)
  • >25%: Dangerous (crowds out other spending)
  • >40%: Crisis (Greek debt crisis hit 30-35%)

Why Japan Can Sustain This Debt Level

Despite alarming metrics, Japan has avoided a debt crisis. Key factors:

  1. BOJ ownership: BOJ holds ~¥540T (~50%) of JGBs, keeping yields artificially low
  2. Domestic ownership: 90%+ of JGBs held domestically (no foreign capital flight risk)
  3. Current account surplus: Japan doesn’t rely on foreign borrowing
  4. Yen as reserve currency: Safe haven status protects against currency crisis
  5. Ultra-low rates: 30 years of near-zero rates = low interest burden

However, these conditions may change:

  • BOJ normalizing policy (ended YCC in March 2024)
  • Aging population reducing domestic savings pool
  • Rising rates would dramatically increase debt servicing costs

For more on BOJ’s role in managing JGB yields, see Section 2.10: MOF-BOJ Relationship.

References

  1. Japan Ministry of Finance. "Budget FY2024." Available at: https://www.mof.go.jp/english/budget/budget/fy2024/index.html. 2024.
  2. Japan Ministry of Finance. "Tax Revenue Statistics." Available at: https://www.mof.go.jp/english/tax_policy/publication/brochure/zeisei2024/01.html. 2024.
  3. IMF Fiscal Monitor. "Japan Debt Sustainability Analysis." October 2024.