I was reading that Japan has a debt to gdp ratio of 240pc and I cannot understand why this has not left the country "bankrupt"? From looking at this like an ordinary person this level would be completely unmanageable. Furthermore, considering Greece had problems with its national debt with a debt to gdp ratio of less than 200pc I am not sure how Japan has sustained significantly higher ratio for so long? Therefore my question is what makes a certain level of debt to gdp ratio sustainable? Also who does the government owe the debt to and does it matter who they borrow from? ie domestic vs international.

For interest see the following graph,

enter image description here

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    Most ordinary persons will not be bankrupt if they have debt equal to their 2 year income (production/output). In fact, lots of mortgage debt is built around this not happening. – FooBar May 1 '16 at 15:03
  • Might be wrong, but isn't debt at 240% of annual income roughly what someone will have in the US just out of medical school? – Scott May 2 '16 at 4:25
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    @FooBar GDP isn't government income, though. If you want to make that analogy, you'd need to use the income figures, not GDP. And there, the figure is a lot bleaker - it's closer to ten times the annual income, and the budget has been in a sizeable deficit for quite a while. – Luaan May 2 '16 at 6:34
up vote 9 down vote accepted

As you have pointed out: where it comes from is very important. As to the Japanese situation it is quiet different from the US position from example. In fact most of the Japanese debt is owned by Japanese people (90% of the current debt). More specifically the BoJ plays a big role as a buyer, and puts pressure on Japanese yield, which makes it cheaper for the government to issue bonds !

Another interesting point that is usually left by anlysts: Japan is the biggest creditor in the world. The country holds a net amount of about 3 trillion USD (367 trillion yen) of financial assets through the world, which makes Japan the first creditor worldwide (before China !).

An interesting further reading which gives other information on the Japanese debt under stress tests of the IMF (P.40): https://www.imf.org/external/pubs/ft/scr/2015/cr15197.pdf

You also might want to read this paper of Rogoff and Reinhart called "Growth in a time of debt": http://www.nber.org/papers/w15639 . It was really criticized but is a good first glimpse... Afterwards you might want to go a little bit deeper into the debt sustainability analysis of the IMF...

Edit

  • "Japan is the biggest creditor in the world" Do you mean the Japanese government or Japanese people and institutions? (Consider that we are talking about Japanese public debt.) – denesp May 1 '16 at 14:26
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    Rogoff and Reinhart's paper was really about giving support to austerity policies. There is nothing like a magic threshold for debt sustainability and even the authors, who have been in the middle of a significant controversy have acknowledged so. This New Yorker's article (newyorker.com/news/john-cassidy/…) gives an insightful outlook at this issue. – dv_bn May 1 '16 at 15:41
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    I agree with @dv_bn however my point was to give an interesting view on the topic and I think this paper is useful regarding the dynamic of debt ! – Alexis L. May 1 '16 at 16:14
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    @AlexisL. You do have to take all sources of public debt into account. But you should not take non-public assets into account on the other side. We are talking about some sort of balance of the public sector, right? Your argument seems to be that Japan has a lot of debt but also a lot of credit, so on net the situation is not so bad. But Japanese firms have a lot of credit. These assets are not owned by the Japanese public sector which has a lot of debt. So on net the Japanese public sector is still a huge debtor. – denesp May 1 '16 at 17:10
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    @denesp if you take a look at the stance of Japan as a creditor, you take the public and private sector into account (it's a global approach). If you only look at what is hold by the government you also have a lot of financial assets (a lot of T-bills for instance, which are not owned by Japanese firms) which makes the net position less alarmist – Alexis L. May 1 '16 at 17:36

I don't think you can sensibly discuss this without including two additional factors:

  • what is the prevailing interest rate?
  • is the debt in local or foreign currency?

The first affects the cost of repayments. Interest rates are at record lows in the developed world. How much money is it reasonable to borrow at 0%? What about -0.1%, is there even a limit that could be sensibly applied to such a negative rate, when the more you borrow the more you will be paid to borrow it?

Secondly, debts in local currency, especially hard currencies like the dollar, yen and euro, are much less risky than debts in non-local currency which can be affected by exchange rate shifts.

Further, like with individuals, it's not sensible to assign a single level beyond which you should not go. It should be more of a process of credit scoring. The 'credit score' for governments is effectively the bond yield. During the European crisis of 2008+, bond yields went high. Today the Japanese bond yield is .. negative. Indicating that it's thought safer to lend your money to Japan than to hang on to it as cash or keep it anywhere else.

Where are the low rates coming from? People and organizations that are extremely wealthy have a problem. The world has run out of good-yielding investments and safe, high-interest debtors. There is literally no safer way of keeping a hundred billion dollars than lending it to a developed world government. Even if you have to pay them for a privilege. It's safer than keeping it in a bank that might go bust.

There is a key factor determining a country's likelihood of default which has only become a research topic in the last decade or two: The quality of its government, in particular the prevalence of corruption. (Interestingly, the type of government -- democracy, autocracy -- is comparatively unimportant.)

Greece has a poor political system; cronyism and corruption are wide-spread. Japan's government, by contrast, works very well (although certainly conflicts of interest for example concerning the regulation of nuclear industry have come to light). So far Japan's creditors trust the country to repay; Greece's are not so sure.

The key point is not the Debt/GDP ratio by itself but the sustainability of the debt over time. The government borrows money from the market and uses taxes to repay it, as households borrow money from banks and use their income to repay it. Before moving on, let's look at a simple debt accumulation equation Inter temporal debt dynamics

where b(t+1) is the debt/GDP ratio in period t+1. It depends in s, that is the primary surplus of the government, r, that is the real interest rate, and gamma, the growth rate of the economy. In Japan the debt/GDP ratio is high but they also have very low real interest rates and a primary surplus which allow them to repay the debt. On the contrary Greece, accumulated to much debt enjoying the low interest rates granted by the Euro. When the crisis hit, markets lost confidence on Greece's ability to pay back. Thus they sell off their bonds. Interest rates sky-rocketed and because of the economic crisis the growth felt down. Moreover, the government had, and still have, many problems in collecting taxes. Therefore, Greek debt is more unstable and dangerous than the Japanese one, even if it is lower both in relative and absolute terms. In a nutshell, default arises when you run out of money for repaying interests regardless of the amount of the outstanding debt. Nonetheless, Japan is in trouble. The more the debt growths, the more budget resources will be allocated to repay interests. Hence, forcing the government either to increase taxes or reduce spending in other areas, something that is politically difficult. Anyway I suggest you to watch this video, it gives a roughly idea of what is going on there Japan's Debt Problem Visualized

Regarding your question on domestic vs international creditors, they are important when the government wants to decide whether to default or not. The more debt is owned by resident the more costly is going to be to default as your citizens would bare the loss. And, in any case, the government has to pay back interest regardless of the nationality of the creditor.

First understand the concept of debt to GDP ratio %. It means country's ability to repay it's debt. Means 240% means Japan has 2.4 times directly reserves to meet it's external debt. It is a good sign low % is a bad sign. Lower than 100% is a bad sign.

  • I'm sorry, but that's not what this means. 240% means that for every unit of GDP, Japan has 2.4 units of debt. It's debt divided by GDP, not GDP divided by debt. High numbers are bad not good in this statistic. – Brythan Oct 12 at 0:35

The current monetary/financial system is unsustainable. Exploding debt is the unavoidable outcome of a Global Debt Based Ponzi Scheme

Commercial banks create the money as debt. All money is debt. Only the principal is created, not the interest payments, so there is always more debt than money. No way to pay it back unless we end the real economy and all start working for the banks that create the money.

Fiat debt based monetary systems have a finite life span. On average it takes around 27 years before fiat money returns to intrinsic value zero.

The human race has a lot of experience with these type of monetary systems. I think there are around 227 cases documented, each time the result is the same.

This time we have tried it on a global scale. All currencies including the reserve currency dollar are fiat debt based.

However poor the results this is still the preferred system. It is preferred by the elites that own the sleep walking masses.

The negative rates are a clear sign that we are near the end of the current system. As the masses are still vast asleep it will be replaced by a similar system. This is the price of ignorance.

See the 1988 cover of the Rothschild publication The Economist. It show a Phoenix standing on burning money, predicting a new world currency in 2018.

It is the currency for global enslavement and it is still right on schedule.

enter image description here

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    Beware sleep walking citizens!! The Elites are out there to get you, they found a way to avoid the no-ponzi condition (economics.stackexchange.com/questions/6037/…) so as to falsify their transversality conditions. Everything shall return to equilibrium as we approach infinity. – dv_bn May 2 '16 at 11:22
  • Well the alternative to ponzi schemes is global enslavement to financial elites.... – D J Sims Jun 22 '16 at 13:20

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