Japan Isn’t Going Greek

Japanese Prime Minister Shigeru Ishiba made headlines Tuesday, claiming his country’s fiscal standing is “worse than Greece.”^[i] This, plus weak demand at the country’s most recent bond auction and rising long bond rates, is fanning fear a Japanese debt crisis lies in waiting. But in our view, this talk is largely politicized rhetoric from an embattled prime minister. And it is obscuring Japan’s long-awaited return to fiscal and monetary normality—no bad thing.

Ishiba’s Greece comparison followed Japan’s weakest bond auction demand since 2012, as 20-year Japanese Government Bonds (JGB) garnered a bid-to-cover ratio—a measure of demand comparing bids for bonds to the number sold—of 2.5.^[ii] Meaning, there were around 2.5 bids per bond offered, down from January’s 3.8, February’s 3.1, March’s 3.5 and April’s 3.0. Japanese long-term yields rose quickly in response, with 20- and 30-year JGB yields jumping 10 and 14 basis points (bps), respectively, to reach highs for this century. Ultra-long 40-year yields hit 3.61%, an all-time high.^[iii] Unsurprisingly, pundits pounced on the volatility near instantly, implying markets are finally starting to sweat high Japanese debt.

If we are looking purely at select figures, it is true Japan’s debt is “worse” than Greece (in its mid-2010s crisis—not now). For instance, Japan’s gross debt-to-GDP ratio, at 234.9%, is the developed world’s highest (on net terms, which excludes government-held debt, it is 134.2%).^[iv] Greece’s gross debt-to-GDP was around 189.6% at its crisis-era peak in 2018.^[v] So, by this surface-level metric, perhaps Ishiba’s comments have some factual foundation.

However, we see some major differences today. For one, Japan’s allegedly bad auction pales in comparison to what Greece faced during its debt debacle. In late 2009, Greece revealed its deficit figures were fudged—and much higher than previously disclosed. At 12.7% of GDP, an incoming Greek government admitted they were well above the eurozone’s 3% deficit-to-GDP limit.^[vi] Sure enough, Greek long yields spiked, ratings agencies downgraded its debt and bond demand dried up—to the extent the country was effectively frozen out of bond markets. It didn’t have any auctions.

With no new buyers to refinance maturing securities and insufficient tax revenue to bridge the gap, the Greek government couldn’t afford to service its pricey debt—birthing multiple aid packages and austerity restrictions from the EU and IMF. These bailouts were a prelude to three Greek defaults that stole headlines for the better part of six years.

In our view, one “bad” auction isn’t comparable to this. Heck, Japan’s 2.5 bid-to-cover ratio isn’t even that bad. It still implies there is more than enough demand to gobble up the bonds on offer, and it is comparable to many rates seen for years and years in other developed nations—including famously debt-averse Germany.

Moreover, Japan’s economy is vastly different from Greece’s. The Greek economy is on stronger footing today, but it is a small economy with limited capital markets and little industry diversity and depth. In the 2010s, it lacked global competitiveness and scope, requiring high public spending to support a huge, bloated public sector—siphoning resources away from private businesses. In recent years, it has privatized as a means to step away from that—with some laudable successes.

Conversely, Japan is the world’s fifth-largest economy. The Land of the Rising Sun is a global economic powerhouse, with its strong high-tech manufacturing businesses, solid services industries and much, much deeper capital markets. We aren’t saying the successive fiscal stimulus packages that drove debt higher over the past few decades were huge benefits or even very smart, but that is a different animal from borrowing hand over fist simply to fund an inefficient public sector. We are talking apples and oranges here, friends. Maybe even apples and squirrels.

Besides, despite widespread fears, this is really just a return to normal for Japan. For decades, the country’s massive state-run postal service/banking hybrid Japan Post used government guarantees to lure savers to high-interest savings accounts. It then used those deposits to buy huge swaths of Japanese debt, effectively creating a backdoor government financing machine that propped up JGB demand. This kept Japan’s debt financing costs low, but it also kept the yield curve artificially flat—a common worry among pundits and gripe for banks trying to compete with the behemoth. It also made lending unprofitable and therefore scarce, hence why some analysts called Japan Post, “The Bank That Ate Japan.”^[vii]

Things changed, though, when former Prime Ministers Junichiro Koizumi and Shinzo Abe pushed for Japan Post’s privatization throughout the 2000s and mid-2010s, aiming to reducing its heft in the JGB market. Their efforts were largely successful, shifting demand from savings accounts (and thus JGBs) to higher returning assets like stocks. It also opened Japanese debt to more market forces, which is no bad thing. Since then, the Bank of Japan’s (BoJ) quantitative easing (QE) program (central bank long-term bond purchases, ostensibly to stimulate growth) has been JGBs’ main demand source, which has also distorted broader demand some. In our view, there is an argument that QE was effectively an asset transfer from Japan Post to the BoJ, which owns around 52% of outstanding debt.^[viii]

Yet the BoJ began slowing purchases in March 2024, freeing up room for more market participants and bringing demand drivers closer to the global norm. So we are essentially witnessing Japan’s slow-moving return to normal—a world where government or quasi-government institutions aren’t supplying the bulk of JGB demand. It should also mean a return to more normal yields, and thus more normal credit markets—a long-term positive, in our view.

Hence, Ishiba’s comments seem more political to us. Especially considering they came amid opposition parties’ calls to cut Japan’s consumption tax ahead of an Upper House election in July. To us, it seems he is using debt fears to try to override the populist appeal of said cuts. Think of that what you will, but it seems to be the die he has cast.

Regardless, Japan’s debt looks serviceable—a key overlooked factor here. About 14.3% of Japan’s tax receipts went to servicing its debt last year, and while the Ministry of Finance expects this figure to rise ahead, Japanese tax revenues should also rise, helping offset that.^[ix] As long as Japan can afford to service its debt, the Greece comparisons seem like overwrought, politically charged rhetoric to us. Not something for investors to sweat.