While financial support is needed for people facing hardships in the face of inflation and stagnant wages, we must not lose sight of the need to craft a more responsible approach to fiscal policy in Japan, argues the economist Katō Izuru.
Needed: More Than Superficial Solutions
I make it a habit of watching the National Diet proceedings when they are broadcast live on television. Recently much of the debate I have seen has focused on the need for robust fiscal outlays, such as by hiking the “¥1.03 million wall” marking the threshold for income taxation, despite any impact it may have on Japan’s future finances in terms of the issuance of Japanese government bonds it may entail.
It is clear that some form of short-term financial support is needed for people facing difficulties in their daily lives due to ballooning retail prices. As I noted in my previous column, though, Japan is less internationally competitive today than at any point in the last three decades. The country’s population continues to dwindle, which makes it all the more important to implement reforms on the private-sector supply side to enhance productivity while working to rebuild Japanese competitiveness as a whole. This will be required if we are to boost Japan’s wages to a level where they sustainably outpace rises in the cost of living.
Should Japan fail to accomplish this, on the other hand, any effort to address the underlying issues with superficial solutions will be little more than handing out discount coupons for shopping at the stores on board the Titanic while it steams toward the iceberg. Sure, it may prop up those shops’ sales for the time being, but the people excited about this prospect have no understanding of the greater threat on the horizon.
Big Debt, Small Growth
The Japanese can never become a wealthy people on a lasting basis if they rely solely on temporary support measures from the fiscal side. Take a look at the graph below, which plots the growth in the ratio of outstanding public debt to the aggregate size of the economy over the period from 2001 through 2024. The countries displayed in it are developed economies with populations of 6 million or more; the horizontal axis places them according to net government debt (publicly held debt minus government-held financial assets) as a percentage of nominal GDP in the most recent year for which figures are available, while the vertical axis shows IMF figures for overall growth in real GDP over the entire period.
The figure makes it clear that Japan is far and away the global leader in terms of ballooning debt, although one often hears mistaken claims that it is in the grips of an austerity program. Despite this, its growth rate since the turn of the century places it near the bottom of the pack.
The 2001–24 period covered by the figure encompasses some major shocks to the global economy, namely the 2007–8 global financial crisis and the COVID-19 pandemic that kicked off in earnest in 2020. But the figure shows that more than half of the countries surveyed saw their public debt loads remain relatively unchanged or even fall during this period—quite dramatically, in some cases. Even more surprising is the fact that these countries all enjoyed healthier economic growth than Japan at the same time.
One common understanding held by all these nations is that fiscal measures to boost demand are unsustainable. There is no way for national authorities to continually hike taxes or slash expenditures in order to free up the resources they require; in the long run, they invariably rely on bond issuance. The upshot is that even when public money is used to spark demand, in the end it depends on the growth and spending potential of the private sector to fuel these efforts.
Looking Abroad for Fiscally Responsible Examples
The countries appearing on the left half of the figure have a very strong awareness of the need for robust fiscal health. Germany and Switzerland, for example, have “debt brake” language written into their constitutions to prevent unchallenged expansions of deficit spending. Underpinning this approach is an understanding that it is wrong to force future generations to pay the bill for debts incurred by the generations active today.
In November 2024 the German coalition government collapsed when a budget gap amounting to just €17 billion exceeded the limit set by the country’s debt brake, triggering a major confrontation between Chancellor Olaf Scholz and Finance Minister Christian Lindner. This year, on March 4, the two major German entities set to form the next coalition, the Social Democratic Party and the Christian Democratic Union/Christian Social Union pairing, announced they would consider loosening the debt brake restrictions that have been applied too strictly in the past, but any loosening of these regulations will still leave far tougher controls than anything seen in the Japanese fiscal approach.
Not included in the German coalition this time, despite gaining the second-highest number of seats in the February election, is the far-right Alternative for Germany. This party has made strides among younger voters in recent years, but it is worth noting that it, too, strongly favors keeping a firm hand on the debt brake. Even populist political parties like the AfD come down on the side of fiscally responsible policy, a most interesting development.
In Sweden, when an elderly person who has lived more than 80 healthy years collapses and is hospitalized, in principle stomach pumping and other life-extending measures are not carried out. This is meant to respect the decisions of a person nearing the end of his or her life, but it is also a way to curtail expensive medical care and maintain the soundness of public finances. The money thus saved is meant to be redirected to the education and care of the younger generations.
And in Denmark, legislation to reduce the number of national holidays by one in order to provide enhanced revenue to cover national defense passed in February 2023, marking the end to a Christian holiday that had been celebrated for more than three centuries. The Danish national contribution ratio—the percentage of personal income paid as tax and social insurance premiums—was a staggering 65% in 2021, compared to 48% in Japan. This leaves little room for further tax hikes, which led the government to ask the nation’s people to work an extra day each year to boost tax revenues and provide needed resources for the nation’s defense.
Switzerland, Germany, Sweden, and Denmark are by no means the only countries reacting to the dangers of ballooning fiscal deficits. Most of the world’s developed economies show similar awareness of the need to avoid red ink. Even in the United States, surveys by the Pew Research Center have shown a rising percentage of those who view deficit spending as a threat to the American economy—rising from 48% of respondents in 2019 to 57% in 2025. Federal Reserve Board Jerome Powell has warned that US deficit spending will not be sustainable into the future.
In Japan, meanwhile, we seem to have a steadily growing number of people claiming that their nation can issue JGBs to continue any level of spending. But the problems inherent in this approach are already evident. The Bank of Japan is seriously concerned that Japan’s outstanding public debt load, already the largest in the world in relation to GDP size, could spark an explosive climb in interest rates, and even though inflation in Japan’s consumer prices is now outpacing that seen in Western economies, the central bank is taking a slow approach to correcting its ultraloose monetary policy. It is this that has driven a plunge in the value of the yen, making food and energy more expensive for the Japanese. We must recognize this cause of the pain we feel at the cash register nowadays.
(Originally published in Japanese. Banner photo: The Democratic Party for the People’s Tamaki Yūichirō speaks to the press at the National Diet in Tokyo on March 4, 2025, following his reinstatement as head of the party following a three-month hiatus. © Jiji.)
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