Public debt management model in Japan
russia’s full-scale invasion of Ukraine, which began almost nine months ago, has had a huge impact on economic activity: real GDP has plummeted, inflation has risen sharply, and the budget deficit has reached unprecedented levels. Military spending in the 2022 budget increased by UAH 387 billion.
Our country is too devastated by the war to cover them on its own. The lack of funds is covered by Ukraine’s Western partners. And although some of the money is given in the form of grants, the bulk of the tranches come in the form of loans. So, with each loan, Ukraine’s public debt will grow.
In today’s world, there is almost no country that does not have debt to external or internal creditors. For example, Japan is the “anti-leader” in terms of debt among the G7 countries and ranks first in the debt-to-GDP ratio ranking.
Despite this, Japan’s economy is one of the most developed economies in the world. It also has a high human development index.
So what is the effectiveness of Japan`s public debt management model?
Japan’s public debt management policy is aimed at issuing government bonds. The main goal is to ensure stable financing of the national accounts and minimize costs.
In line with these objectives, the government analyzes market conditions and makes efforts to manage government bonds in line with investor needs and market trends.
The Japanese government issues government bonds (JGBs), which can be divided into two types:
- general sectoral bonds (construction bonds, special deficit financing bonds, reconstruction bonds, and reimbursement bonds);
- fiscal investment and loan bonds (FILP Bonds).
Moreover, they are issued with the same interest rate and maturity (from 2 to 40 years). The Japanese authorities flexibly adjust the amount of the issue in accordance with the market environment and investment needs of market participants.
A feature of public debt management in Japan is the diversity and specificity of bonds. The country “breaks down” securities to encourage the population to invest to improve the country’s living standards and welfare, such as construction bonds, special deficit financing bonds, reconstruction bonds, and reimbursement bonds, etc.
In Japan, public debt is used to finance road construction, air and rail transport development, communication systems, and disaster relief. In other words, Japan’s loans are investment and innovation oriented. In addition, Japan ranks third in the world in terms of nominal GDP (as of February 2022).
In Japan, about 70% of government bonds are purchased by the Bank of Japan, with the majority of the rest being held by Japanese banks and trust funds. It turns out that the holders of the country’s public debt are mainly domestic creditors, which allows Japan to be independent of international partners and attractive to creditors. As a result, the prices and yields of securities are isolated from the global market, and their sensitivity to changes in credit ratings is reduced.
It would seem that the model of issuing government bonds is quite successful and protected from external risks.
However, Japan`s economy has its own challenges
Japan’s public debt is almost twice as high as the country’s GDP, and the trade deficit is growing. Undoubtedly, the COVID-19 crisis had a huge impact on the country’s economy.
It would seem that Japan has mobilized in the face of critical conditions. However, the external environment surrounding the bond market did not allow for the normalization of the country’s policy after the COVID-19 outbreak.
In 2021, Japan’s public debt amounted to about $12.54 trillion, which is 234.4% of GDP. The country has recently reported a trade deficit. This means that the value of its imports exceeds the value of its exports. Most of these imports came from China and the United States.
After Japan entered fiscal year 2020, the government declared a state of emergency for seven major provinces and later for the entire country. The country’s trade remained inactive, so government bond yields were around 0%. The public debt is expected to show an upward trend until 2026.
The war in Ukraine is characterized by socio-economic problems, increasing state obligations to creditors, and a low level of debt security. Therefore, one of the most important problems in the country is the growth of public debt, which in the future may negatively affect both the standard of living of the population and the independence of the state.
The “anti-leader” in terms of debt among the G7 countries is Japan, which ranks first in the debt-to-GDP ratio ranking. At the same time, Japan’s economy is one of the most developed economies in the world, and the country has a fairly high human development index.
The “anti-leader” in terms of debt among the G7 countries is Japan, which ranks first in the debt-to-GDP ratio. At the same time, Japan’s economy is one of the most developed economies in the world, and the country has a fairly high human development index.
One of the problems of Japan’s economic development is the excess of imports over exports, i.e. the trade deficit, as well as the growth of public debt, which is projected to increase by 2026.
The holders of the country’s public debt are mainly domestic creditors – the Bank of Japan, Japanese banks, and trust funds. This means that Japan owes most of its debt to itself. This allows the country to be independent of international partners and attractive to investors. As a result, bond prices and yields are isolated from the global market, and their sensitivity to changes in credit ratings is reduced.
The peculiarity of the public debt management model in Japan is the variety and specificity of bonds – construction bonds, special deficit financing bonds, reconstruction bonds and reimbursement bonds, etc. In other words, Japan’s loans are investment and innovation oriented. Thus, the country creates conditions for investing in its own development, where citizens are part of the pillar of the economy. This also largely reflects the high human development index.
Thus, although Japan’s public debt is the highest among highly developed countries, it does not hinder the country’s development and high living standards, but even contributes to them through effective public debt management and domestic economic management in its own way.