Japan's debt - Is the country at risk?

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A first world country like Japan is able to provide a good quality of life for its inhabitants thanks to a large and prosperous economy. But, like all countries in the world, Japan has its own problems. And one of the most serious problems is your national debt.

This time, I am not going to talk about any explicit social problem or that has little public attention. In this article, I’ll talk about Japan’s economic situation.

Japan is one of the most developed and most influential countries in the world. However, it is also the most indebted country in the world, with a substantial debt of around 233% of GDP on its shoulders.

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For those who don't know, Japan is in first place in debt. Yes, Japan has the largest debt in the world. Its public debt is estimated at more than 1 quadrillion yen (US$: 9 trillion and R$: 29 trillion). Japan is in danger of entering a severe economic crisis if it cannot find a solution to this problem.

Where did this huge debt come from?

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First, let's take a look at how Japan got stuck in debt when the economy rose to power and prominence.

Japan became an influential economic power in the 1980s. At the expense of an economic bubble created after World War II. However, Japan's economic policies have placed the country in monstrous debt.

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The Japanese government was unable to hit the tax collection target thanks to the policy of low taxes and interest rates. At the same time, the Bank of Japan was lending a lot of money to its creditors. Subsequently, the economic bubble that was created in the post-war years burst.

The stock market plummeted, the stock price fell and the Bank of Japan found itself in huge debt. National companies were in the same financial situation. However, to avoid mass unemployment, the government provided financial support to these companies. The government has practically not let these companies go bankrupt.

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The Japanese government and the Bank of Japan provided low-interest credit to these companies. Thus, they depended on financial support. But it turned out to be unsustainable. Therefore, banking institutions had to be consolidated and nationalized.

Thanks to populist policies, the government avoided adjusting the price of taxes and interest and insisted on supporting broken companies. Consequently, this only increased the debt.

Over many years, other fiscal stimulus initiatives have also been used to adjust the economy. Because of these government-approved actions, Japan's debt level has skyrocketed to become the highest in the world.

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How has Japan not yet broken?

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Japan is still in good shape because it can adjust interest rates to low levels so that payment amounts remain low in relation to the general level of debt. At the same time, Japan is fortunate to still attract investors from around the world. Even so, the debt is so big that it scares any investor.

Sooner or later, the situation may become untenable. The debt is so great that it is impossible for Japan to be able to repay it at once.

To reduce the burden, the Bank of Japan cuts interest rates and buys government bonds to provide more money to the financial system. Theoretically, this artificially minimizes the total interest payment. As the Japanese government's negative balance is so high, interest expense can easily be affected by the rate hike.

Does Japan's aging contribute to this?

Japan's population is shrinking and aging. So it is highly doubtful whether the country can increase national savings. Thus, the only way to reduce the loss is to have foreign investors.

However, the problem is that the constant aging of the Japanese population affects the economy. More aging people, less young workers to make GDP grow. Much of Japan's debt is financed through savings from Japanese citizens. Savings that are channeled through pension funds and life insurance.

Japan is extremely conservative when it comes to money. There is no consumer culture in material goods. This trend means that the people's money goes into the Japanese debt. As the Japanese population ages, people withdraw from these funds and insurance. As a result, it becomes increasingly difficult to finance debt within the country.

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Will Japan end up defaulting?

Japan could default, but as it stands, it has trillions of state assets that would be sold in the event of default, so a default is unlikely. What you can see is a divestment of state assets if the debts cannot be paid. Some of the companies supported by the Japanese government are worth trillions of dollars, so it's not like Japan is going to crash. At least for a while…

The Japanese government is likely to end up printing money. It is a short-term solution, despite devaluing the currency. But in the situation in Japan, rather than defaulting on debt.