Japan's Debt Burden Faces New Reality as Inflation Returns

Japan's public debt has surpassed 230 per cent of its GDP, making it the highest among advanced economies. Despite this, the country has largely escaped debt crises and runaway inflation for over three decades.

The government bond yields remained close to zero, inflation was virtually absent, and investors considered Japanese Government Bonds (JGBs) as one of the safest financial assets in the world.

However, the return of inflation after 2022 has altered this environment. The country is now confronting a gradual erosion of economic conditions that made its unconventional fiscal and monetary model sustainable for over thirty years.

Japan's debt burden is fundamentally different from previous sovereign debt crises, as it borrows overwhelmingly in its own currency. More than 90 per cent of Japanese Government Bonds are held domestically by households, banks, pension funds, insurance companies, and the Bank of Japan itself.