Japanese government bond yields (JGBs) have soared in recent months, most recently on concerns about the unfunded budget deficit under the proposed expansionary fiscal policies of new Prime Minister Takaichi. That said, what may look like a toxic outlook for Japanese debt is tempered by several mitigating factors, which imply that a debt crisis is not imminent.
The low government budget deficit and a pickup in nominal GDP growth have reduced the government debt-to-GDP ratio over the past few years. JGB yields have risen sharply but are well below the nominal GDP growth rate. There is also a limited amount of maturing debt over the next few years and foreigners hold only 12% of government bonds.
Nonetheless, over the long haul, the government’s debt burden represents a fundamental economic risk that hinges on avoiding a return to deflation while ensuring a stable JGB market.
