For decades, Japan relied on borrowing to support struggling farmers, aging citizens, and regions facing economic decline. With interest rates near zero, debt seemed like a painless solution, especially during the Covid-19 pandemic, when government payouts expanded into subsidies for inflation relief and military spending.
Japan’s national debt has now ballooned to nearly $9 trillion—more than twice the size of its economy. But the backdrop is changing. The Bank of Japan is phasing out its ultra-low interest rate regime, making borrowing more expensive. Bond yields have climbed sharply, reflecting market anxiety. A failed auction for 40-year government bonds last week underlined investor unease, the New York Times reported.
Rising political and fiscal pressures
With upper house elections looming this summer, Prime Minister Shigeru Ishiba faces increasing demands from small businesses and voters hit by inflation and US tariffs. Calls to roll back taxes are growing louder, even as Ishiba warns of the “terror” of higher interest rates and invokes the spectre of Greece’s 2009 debt crisis.
No immediate meltdown, but red flags abound
Although most of Japan’s debt is domestically held—by the Bank of Japan and local institutions—reducing the risk of a sudden flight of capital, experts warn the country is approaching a breaking point. Koji Yano, a former finance ministry official, believes Japan is nearing a credit downgrade. “Yellow lights are flashing,” he said. “Any of them could turn red.”
Populism and spending collide
Japan’s ruling Liberal Democratic Party has long used government spending to maintain political control and suppress populist uprisings. But a new wave of discontent, especially among urban white-collar and contract workers, is pushing back. Inflation and stagnant wages have left many feeling the burden of government largesse they don’t benefit from.
Tax cuts deepen political divides
Public anger has led to rare protests outside the Finance Ministry. Opposition parties are campaigning to reverse the 2019 consumption tax hike. Within the ruling party, figures like Sanae Takaichi demand tax cuts, while Ishiba resists. In 2021, Yano controversially warned that the country was “a ship headed for an iceberg”—a critique that earned fierce backlash from party leaders.
Looking ahead: a tightening fiscal future
Analysts like CLSA’s Leif Eskesen believe Japan isn’t headed for a “Greece-like” collapse soon. But they agree the current path isn’t sustainable. Aging demographics, rising pension and healthcare costs, and now higher interest rates mean Japan must start serious fiscal reform soon. As Eskesen put it, Tokyo needs to start “delivering on promised fiscal consolidation.”
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