Japan’s Debt Crisis: A $10.5 Trillion Time Bomb for Global Economy

Japanese government debt poses growing risk to global economy

Japan has the highest public debt in the world, measured as a percentage of gross domestic product. According to the most recent data from the IMF and the Japanese government, Japan’s gross public debt amounts to approximately USD 10.5 trillion, equivalent to more than 260% of GDP. By comparison, the United States’ public debt is approximately 125% of GDP, Italy’s 140%, and Germany’s approximately 65%. This exceptional debt ratio raises questions about its long-term sustainability and potential repercussions for the global economy.

Structural causes of debt accumulation

The Japanese debt crisis has deep structural roots dating back to the 1990s. Japan is facing one of the world’s fastest-aging populations, with more than 28% of the population over 65. At the same time, the birth rate is falling dramatically, leading to a shrinking working-age population. This demographic shift is resulting in rising expenditures on pensions and healthcare, while the tax base is shrinking.

Since the collapse of the real estate and stock markets in the early 1990s, Japan has experienced a prolonged period of low economic growth and deflation. This economic malaise has prompted the government to implement frequent stimulus measures, which has contributed to structural debt growth. Prime Minister Shinzo Abe’s economic reform agenda, known as “Abenomics,” combined expansionary monetary policy, fiscal stimulus, and structural reforms. While these measures temporarily generated growth, they also led to a further increase in government debt, partly due to massive bond purchases by the Bank of Japan.

Characteristics of Japan’s debt situation

A striking feature of Japanese government debt is that approximately 90% of it is held by domestic actors, including institutional investors such as pension funds and insurance companies, households, and, most importantly, the Bank of Japan. This domestic ownership makes Japan less dependent on foreign creditors, which limits short-term liquidity risks but simultaneously creates new vulnerabilities.

As of 2025, the Bank of Japan holds more than 50% of all outstanding government bonds as a result of prolonged monetary easing. As a result, a large portion of government debt is financed monetarily, which ultimately raises questions about the central bank’s independence and room for maneuver. Interest rates on Japanese government bonds remain historically low, often even with negative yields. This low interest burden makes it possible to maintain exceptionally high debt without triggering an acute budgetary crisis, but simultaneously creates a latent vulnerability should interest rates suddenly rise.

Risks and vulnerabilities

Although the situation has remained stable to date, several risks are associated with the current debt dynamics. If domestic or international investors lose confidence in the sustainability of Japan’s debt, this could lead to capital flight, a sharp devaluation of the yen, and rising interest rates. In that case, the central bank would be forced to intervene, with potentially destabilizing consequences for global financial markets.

After decades of deflation, Japan has recently experienced rising inflation, partly due to rising energy prices and a weak yen. Combined with limited economic growth, this could lead to stagflation, severely limiting policy options for both the government and the central bank. The Bank of Japan’s massive purchases of government debt are unsustainable in the long run, and attempts to normalize policy could lead to market instability and rising interest rates.

International implications

While Japan’s debt appears at first glance to be an internal problem, there are significant indirect risks for the United States and global financial stability. A debt crisis in Japan would lead to higher risk premiums globally, with bond yields rising, including on US Treasuries. This would significantly increase US borrowing costs and potentially lead to sharp corrections in financial markets.

A large-scale devaluation of the yen would put pressure on the US export position and could lead to trade conflicts or competitive devaluations, jeopardizing the stability of the global currency system. Moreover, Japan is a core ally of the US in the Asia-Pacific region, and its economic weakening could affect the regional power balance, particularly vis-à-vis China.

Impact on other economies such as Russia

Other economies, including Russia, are also experiencing indirect effects from Japan’s debt situation. A Japanese financial crisis would lead to global volatility in financial markets and capital flight from emerging markets, which could further complicate access to capital for Russian companies and banks.

For Russia, which is already largely excluded from Western capital markets by sanctions, additional unrest could erode the ruble’s value.

Japan is one of the world’s largest LNG importers, and a weakening of the Japanese economy could depress global gas or oil prices. This has immediate negative consequences for Russia, where energy exports are a cornerstone of the economy.

At the same time, an economic weakening of Japan could increase China’s influence, which Russia could leverage to its advantage through BRICS or bilateral energy deals.