Source: IMF World Economic Outlook, Scope Ratings forecasts
Japan Helped by Cost-of-living Crisis
Japan is among a select number of sovereigns (including Greece) that have been helped significantly from a credit standpoint by the cost-of-living crisis. High inflation has cut elevated debt ratios after many debt-reduction strategies of past decades proved less effective, while low-interest and long-maturity debt structures have aligned with more significant space for higher borrowing rates.
Net interest payments amounted to a low 0.5% of Japan’s government revenue in 2023 and Scope foresees net interest payments rising gradually to a still-modest 2% by 2028 under an assumption of higher rates for longer.
So although Japan holds the highest debt ratio of any sovereign in Scope’s rated universe, it pays among the least interest. The effective interest rate on remains stays near 0% within our forecast horizon to 2028.
Debt sustainability is also supported by the fact that Japan’s debt is predominantly domestically held, denominated entirely in yen, and 48% has been monetised by the Bank of Japan. Because of the latter fact, the amount of rateable debt due to the private sector is much lower than the sovereign’s gross debt ratio. Although the BoJ ended yield-curve control recently, it continues purchasing bonds in secondary markets broadly as before, ensuring further rises of the share of government debt it holds.
Finally, as the world’s largest creditor nation, Japan holds gross government financial assets of around 96.7% of GDP (IMF, 2023), nearly equal in size to gross debt due to the private sector. On this basis, the aggregate debt-sustainability picture is more benign than the sovereign’s very-elevated debt ratio alone might suggest.
For a look at all of today’s economic events, check out our economic calendar.
Dennis Shen is Senior Director in Sovereign and Public Sector ratings at Scope Ratings GmbH , and primary analyst on Japan’s sovereign credit rating. Keith Mullin, senior writer at Scope, contributed to drafting this economic comment.
