A curious economic development was announced today, which made small waves but carries huge implications for the investment world: total Japanese government debt surpassed the 1 quadrillion yen mark. Equal to roughly $10 trillion, this moves the most-indebted nation on the planet even further into the unfamiliar ground of money printing. While most agree that the increase does nothing to help the nation's perception as a low-growth, high-debt country, the larger questions – which continue to go unanswered – relate to what, if any, impact this shift will actually have.
How did Japan get here? The long-term boost in government debt began as the country emerged from World War II. The post-war construction boom lifted the nation out of poverty, but as growth slowed in the 1980s the government was forced to borrow in order to stimulate economic expansion. This policy was continued, leading to what has been dubbed Japan's "Lost Years" and exacerbating the short-term problems being experienced today. Abenomics – the controversial fiscal/monetary regime enacted by Prime Minister Shinzo Abe's administration – has led to a dramatic increase in central bank support, pushing the total level of debt even higher.
What remains to be seen is if market participants will demand a higher interest rate on Japanese government debt. As many of these bonds are purchased domestically, interest rates are somewhat shielded from this effect. However, it leaves Japanese officials with little dry powder to respond to the next financial crisis should it flare up and send markets roiling as it did earlier this year.
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