Seeing Through Japan’s Re-Run Debt Fears

Here is something that has long puzzled us: What is the tipping point where headlines flip from calling something a potential future problem to an actual, real-time crisis? We ask because, for years, pundits have warned Japan’s sky-high public debt could eventually be a problem, at some fuzzy future point. It is a frequent re-run in headlines. And it is back now! Many claim its debt crisis is here, even though nothing in Japan’s debt markets remotely resembles, say, Greece in 2010. Meanwhile, Japanese stocks just hit new all-time highs, GDP squeezed out some growth in Q2 and corporate earnings are upbeat. Seems to us markets see the truth of Japan’s fine fiscal health, even if headlines don’t.

Debt crisis claims rest on two points: Japan’s seemingly astronomical debt-to-GDP ratio and rising long-term interest rates, which pundits warn raise the cost of servicing that Mt. Fuji of debt. It all gives the impression public finances are about to go Godzilla on Tokyo. But the narrative misses some key things. For one, Japan’s debt-to-GDP ratio is actually down over the past few years, thanks to solid GDP growth. Two, the more meaningful measure, interest costs as a percentage of tax revenues, is also down as growth lifted the tax take. So even with higher rates, Japan’s debt is becoming more affordable, not less.

And three, most important: Acute debt crises arrive when the government can’t issue or refinance maturing debt because no one will buy its bonds. That is what happened in Greece, Ireland and Portugal in the 2010s. And Argentina at several points in its history. The late-1990s’ Asian financial crises happened because governments couldn’t service debt issued to foreign investors in US dollars. None of these resemble Japan’s situation. While the yen famously hit 40-year lows this summer, it meant next to nothing for Japanese Government Bonds (JGBs), the vast majority of which are owned by Japanese entities. Meanwhile, bond auctions are routinely oversubscribed. Today, a five-year JGB auction fetched a bid-to-cover ratio of 4.15, meaning over four bids for every bond sold—the highest in over a year.^[i] August 4’s 10-year auction received bids 2.56 times the amount on offer.^[ii] A small 40-year JGB offering on July 22 boasted a 2.82 bid-to-cover.^[iii] July 2’s 10-year auction saw a 3.13 bid-to-cover ratio.^[iv] Demand is just fine. Investors aren’t buying what scary headlines are selling them.

We doubt GDP’s hitting a bit of a speedbump in Q2 changes this. Headline growth was fine, 1.1% annualized, but it came entirely from inventory building and net trade, which included a fall in imports (a symptom of iffy domestic demand).^[v] Household spending slipped -0.3% annualized, and business investment fell -4.6%.^[vi] Some of the latter stemmed from an accounting move as one pharmaceutical company sold its patent rights to an overseas entity, but there were also anecdotal reports that higher energy and resource costs (due to the war and the weak yen) motivated businesses to delay some projects.^[vii]

To us, this weakness looks temporary. Energy markets and supply chains have moved on from the acute pressures of April 2026, giving Japanese businesses more clarity. Bank of Japan rate hikes, should they happen, would help alleviate pressure on the yen, which should further reduce businesses’ costs. Some of the government’s recent “stimulus” measures are set to kick in next spring, giving households a little more wiggle room. And while it gets little notice, continued wage growth should also help consumers overcome recent price pressures, as it most always has before.

Moreover, the stock market isn’t the economy. Japan is home to some rock-solid multinationals that benefit from global trends, which helps explain the MSCI Japan’s 59.7% y/y Q2 earnings growth (with all but three companies reporting).^[viii] While some of that is currency translation, 16.2% y/y revenue growth speaks to companies’ strength.^[ix] Solid growth stretches beyond Japanese Tech, including Industrials and Financials. That last one is crucial, with 34.0% y/y earnings growth enabled in part by the higher long rates most pundits now seemingly dread.^[x]

So no, Japan isn’t a debt crisis basket case. Its economy is competitive, full of healthy private businesses making big money. Investors are happy to buy its debt, and they require less of an interest premium than bond investors elsewhere. You don’t have debt crises when your yields are below global peers and demand is robust. This is a false fear, a major brick in Japan’s wall of worry.