Japanese debt and its economic consequences

• In 2025, Japan holds the highest public debt ratio among developed economies, at 254.6% of GDP. 

• The Bank of Japan has sustained this debt by maintaining near-zero interest rates since 1999. 

• From 2023, rising inflation led the BOJ to raise rates, sharply increasing long-term bond yields. 

• Higher yields have raised debt servicing costs and weakened investor confidence. 

• Without the implementation of structural fiscal reforms, Japan now faces the risk of a self-reinforcing debt spiral. 

In 2025, Japan has the highest public debt ratio among developed economies. This ratio is estimated at 254.6% of GDP (IMF, April 2025). This debt has been sustainable thanks to the monetary policy implemented by the Bank of Japan (BOJ), which has maintained near-zero interest rates since February 1999. This zero-interest rate policy has created an environment conducive to the accumulation of significant public debt. However, in 2023, to cope with rising inflation, the BOJ was forced to raise its key interest rate. This increase forced the government to offer significantly higher yields to investors holding Japanese government bonds. The country therefore faces a precarious fiscal situation: its high public debt and rising yields are weakening the national budget and eroding investor confidence in the Japanese bond market. Japan risks entering a self-reinforcing debt spiral: the more expensive the debt becomes, the more difficult it is to repay, which pushes rates even higher. 

The origin of Japan's debt dates back to the bursting of Japan’s asset bubble in the early 1990s. To support the economy in the face of stagnant growth and persistent deflationary pressure, the Japanese government significantly increased public spending. This expansionary fiscal policy was made possible by the constant intervention of the Bank of Japan (BOJ), which introduced a zero-interest rate policy (ZIRP) in February 1999. This policy allowed the Japanese government to accumulate significant debt while keeping debt servicing costs relatively low for more than two decades. 

However, starting in 2023, the BOJ began to gradually raise interest rates as it faced persistent inflation, with the consumer price index reaching 3.6% in May 2025 (Trading Economics). This caused a sharp rise in yields on long-term government bonds. In May 2025, yields on 30- and 40-year bonds reached 3.09% and 3.675%, respectively (Wolf Street, 2025), levels not seen in years. In fact, yields have increased nearly fivefold since 2020, when rates on 30- and 40-year bonds were around 0.5% and 0.7%. This rise, therefore, makes public debt financing more expensive for the Japanese government. 

Consequently, the markets are showing clear signs of eroding investor confidence. Demand at the last auction of 20-year bonds was the lowest since 2012 (Bloomberg, 2025), a sign of growing investor nervousness about Japan's ability to manage its debt. Simultaneously, budgetary pressures are intensifying. Debt servicing is absorbing an increasing share of public resources, limiting the government's fiscal space in financing social spending, investment, or stimulus policies. 

These tensions are further exacerbated by signs of economic weakness in the Japanese economy: GDP contracted by 0.7% in the first quarter of 2025 (Reuters, May 2025), and rising living costs, particularly for food, with the price of rice doubling in one year (Reuters, 2025), are fueling rising social unrest. In an attempt to mitigate inflationary effects, the government had to release up to 600,000 tons of its strategic rice reserves in May 2025. 

As a result, Japan's public debt is no longer merely a theoretical constraint: it is becoming an active factor in economic fragility. The combination of record debt levels, rising yields, and an economic slowdown could push Japan into a cycle of financial and fiscal fragility. 

In conclusion, Japan finds itself at a crucial juncture in its fiscal trajectory. The rise in interest rates is calling into question the sustainability of historically high public debt and causing visible tensions in financial markets as well as in domestic social stability. Without undertaking comprehensive structural reforms, the country faces the risk of a domestic financing crisis and the erosion of its fiscal sovereignty. The months ahead will be critical in determining whether the Japanese authorities can restore market confidence while protecting their economy from a spiral of lasting vulnerability.