Follow Us




In-depth Tax and Reform: Dealing with Japan’s Runaway Debt
The Barriers to Budget Balance in Japan

Okazaki Tetsuji [Profile]


Despite the crisis-level size of its public debt, Japan continues to run large deficits financed by additional borrowing. Economic historian Okazaki Tetsuji examines the barriers to restoring health in government finances.

Japan’s Level of Public Debt Towers Over Other Countries’

According to comparative international statistics from the Organization for Economic Cooperation and Development, Japan’s public debt (“general government” debt, including the debts of local governments and social security funds) as of 2012 was equivalent to 218.8% of the country’s gross domestic product. This figure is more than twice that of the United States (102.1%) and about 1.3 times that of Greece (167.3%), whose 2010 debt crisis attracted global attention; it is the highest debt level among the OECD member countries.

If we focus just on the changes in Japan’s public debt over time, we find that the ratio to GDP as of 2012 had already topped the level reached in fiscal 1944 (April 1944–March 1945), after eight years of waging all-out warfare following the outbreak of the second Sino-Japanese War in 1937. The huge government debt that accumulated during the war years was impossible to pay off by ordinary means; in the end it was cleared away by the galloping inflation that continued through the years after the end of the war—in effect, an “inflation tax.” Over the five years from 1944 to 1949, when the rapid inflation came to an end, wholesale prices rose by a factor of 90. In other words, the value of the government’s debt, which was in the form of bonds with fixed face values, fell to one-ninetieth of its previous level. The losses were effectively borne by the members of the general public who owned government bonds either directly or indirectly through financial institutions.

Thanks in large part to the effect of this inflation tax, the ratio of public debt to gross national product plunged to 14.0% by fiscal 1950. The figure declined further during the period of rapid economic growth that got underway in the latter part of the 1950s, and as of fiscal 1964 it was only 4.4%. After that, though, the figure started rising again, and since the 1990s it has been climbing at an accelerated pace.

An Aging Population and Extreme Rigidity in Public Finances

Japan’s public debt has already reached a crisis level, and what makes the situation even graver is the fact that the government continues to run up deficits year by year. Under the budget for fiscal 2014, enacted by the National Diet on March 20, the government is planning to borrow ¥41,250 billion, a figure that amounts to 43.0% of the expected total revenues of ¥95,882.3 billion. The primary balance (the balance between revenues excluding new borrowing and expenditures excluding debt service) will be in the red to the tune of ¥22,611.1 billion; this shortfall will have to be covered by an equivalent increase in government debt, an increase amounting to almost 5% of GDP.

There is also a problem in the structure of expenditures. Debt service and social security costs, categories of spending over which the government has little discretion, account for 24.3% and 31.8%, respectively, of expenditures; together these nondiscretionary appropriations make up 56.1% of the total for the year. In the latter part of the 1960s, as the government’s debt started to climb, the Ministry of Finance focused on the problem of fiscal rigidity—the rise in the level of nondiscretionary spending—and proclaimed the need to correct it. But as of fiscal 1968, when the ministry was waging its campaign against this rigidity, debt service and social security accounted for just 3.5% and 14.1%, respectively, or a combined share of 17.5% (after rounding) of total spending. By comparison with those days, Japan’s public finances have become rigid to a much more extreme degree.

The rapid aging of Japan’s population is the fundamental factor underlying the present state of the country’s public finances. Social security expenditures are the main cause of the swelling of government spending, and the bulk of these expenditures are used for senior citizens in the form of pensions, medical care, and long-term care. These benefits for the elderly account for 73.9% of social-security-related appropriations in the fiscal 2014 budget.

The Democracy Trap in the Way of Fiscal Rehabilitation

It is politics, however, that has caused this situation to turn into a fiscal crisis. From the late 1960s, when the government debt started to swell, through the present, there have been repeated attempts to repair Japan’s public finances, including the Ministry of Finance’s campaign against fiscal rigidity. Among the efforts that have been undertaken for this purpose, three stand out: the introduction of the consumption tax, an across-the-board 3% levy on sales, under Prime Minister Takeshita Noboru in 1989, the hike of the consumption tax rate to 5% under Prime Minister Hashimoto Ryūtarō in 1997, and the move to hike the rate to 8% in April 2014, which was enacted under Prime Minister Noda Yoshihiko in 2012 and is being implemented under Prime Minister Abe Shinzō. The administrations that decided on these moves were all trounced by the voters at the next election. 

This experience highlights the difficulty of fiscal rehabilitation in a democracy. Since individual voters bear only a fraction of the cost of the benefits they receive from the public purse through the taxes they pay, their political judgment tends to be biased in favor of increased benefits for themselves, meaning more government spending. And when a tax hike is proposed, people tend to throw their support behind politicians who glibly assert that wasteful spending by others is the cause of the deficit and claim that the hike will not be needed if the waste is eliminated.

  • [2014.04.21]

Professor, Graduate School of Economics, University of Tokyo. Born in 1958. Received his doctorate in economics from the University of Tokyo, where he has held his present position since 1999. Visiting professor at Stanford University, 2002–3. Vice-president of the International Economic History Association since 2012. His works include The Japanese Economic System and Its Historical Origins (coauthor) and Keizaishi no kyōkun (Lessons from Economic History).

Related articles
Other articles in this report
  • Clock Running Down on Social Security ReformFixing Japan’s public finances requires rethinking pensions, medical expenses for senior citizens, and other costs to the social welfare system. Yashiro Naohiro, visiting professor at International Christian University, looks at what reforms are needed to make social security sustainable as the population grays.
  • Confronting Japan’s Unpleasant Fiscal ArithmeticThe Japanese government has faced stiff resistance to planned increases in the consumption tax, the first of which was implemented on April 1. But according to recent calculations, even the 10% rate scheduled for 2015 pales beside the revenue increases needed to avert a financial meltdown over the next few decades. Keiō University economist Kobayashi Keiichirō reviews this “unpleasant arithmetic” and urges the government to plan accordingly.

Related articles

Video highlights

New series

  • From our columnists
  • In the news