Research Team at Wells Fargo, notes that among the advanced economies of the world, Japan has the highest debt-to-GDP ratio at nearly 250 percent of GDP.
Key Quotes
“Yet, yields on Japanese government bonds (JGB) out to ten years are negative at present, and the yield on the 30-year JGB is less than 1 percent.4 Although a detailed discussion of JGB yields is beyond the scope of this report, the debt-to-GDP ratio of the Japanese government would be even higher if borrowing costs were not at (or near) rock bottom.
In the “current” scenario, the debt-to-GDP ratio of the Japanese government remains more or less constant through 2030. This scenario assumes that primary deficits remain unchanged at 5.4 percent of GDP and that nominal GDP continues to grow at the 2015 rate of 2.5 percent per annum. The problem with this scenario, however, is that nominal GDP growth in Japan has averaged only 1 percent per year since 2010.
In other words, last year’s growth rate is somewhat of an outlier. In addition, negative yields on JGBs also help to constrain the rise in the debt-to-GDP ratio. But how long can yields on government bonds remain negative?
The bottom line is that the Japanese government needs to undertake a significant amount of fiscal tightening in coming years if it hopes to stabilize its debt-to-GDP ratio. But, as we pointed out above for the case of the United Kingdom, fiscal tightening tends to depress GDP growth, at least in the short run. Therefore, the Japanese government may need to fully embrace structural reform to raise the country’s long-term economic growth rate.”
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