What’s behind Japan’s High Government Debt?

Japan’s government debt as a percentage of its gross domestic product (GDP) in 2023 was 195%, the highest share among major advanced economies.In this blog post, government debt refers to the total amount of government bonds issued by the central and local governments. The concept of public liability, on the other hand, encompasses not only debt but also other liability instruments, such as loans, held by a broader range of public institutions, including but not limited to social security funds and public financial institutions. As will become clear later, we argue that to analyze Japan’s fiscal situation, one must focus on the consolidated balance sheet of the public sector—considering both assets and liabilities—rather than the narrowly defined government debt. This high level of government debt mainly stems from decades of persistent fiscal deficits and near-zero economic growth, both largely driven by Japan’s aging population.

By the mid-1970s, Japan’s fertility rate had fallen below the replacement rate of 2.1 children per woman. The fertility rate continued to decline steadily over subsequent decades. Combined with increased life expectancy, this trend placed Japan on a path to becoming a rapidly aging society. In 2001, the share of Japan’s population ages 65 and older was 18.4%. By 2024, this share had grown to 30.2%. Projections indicate this trend will continue, reaching 36.7% by 2045. (See the figure below.)

Japan’s Rapidly Aging Population

SOURCES: World Bank and authors’ calculations.

Challenged by a Large Social Security Deficit

As Japan’s population continues to age and its economic growth remains near zero,The combination of an aging population and a decline in overall population has resulted in a shrinking workforce, a key factor in Japan’s prolonged economic stagnation. See Jesús Fernández-Villaverde, Gustavo Ventura and Wen Yao’s 2025 article “The Wealth of Working Nations,” in European Economic Review. the country faces a persistent fiscal challenge: a large social security deficit. The deficit increased from 4.1% of GDP in 1998 to 9.4% in 2011. In response, the Japanese government introduced major social security reforms in the early 2010s, notably under former Prime Minister Shinzo Abe. These reforms aimed to curb medical expenditures, adjust public pension contributions and payouts, and boost labor force participation among women and the elderly. These efforts managed to stabilize the growth of the social security deficit, but it remains substantial at 7.6% of GDP as of 2023.

Due to the large social security deficit, Japan’s general government (which comprises the central and local governments) has consistently run a significant primary fiscal deficit, averaging 5.1% of GDP since 1998. Notably, the average primary deficit is smaller than the social security deficit, indicating that the government would have run a surplus if social security deficits were excluded.

Fiscal consolidation efforts over the past decade, including consumption tax hikes in 2014 and 2019, have helped reduce the primary fiscal deficit but remain insufficient to balance the Japanese budget. As a result, financing Japan’s primary fiscal deficit has mainly relied on raising government debt, which increased from 70% of GDP in 1998 to 195% of GDP in 2023. As shown in the figure below, the trajectory of Japan’s general government debt closely mirrors that of its cumulative primary fiscal deficit.

Japan’s Government Debt and Cumulative Primary Fiscal Deficit Have Followed Similar Paths

SOURCE: National Accounts of Japan, Cabinet Office, and authors’ calculations.

Decisions behind the Government Debt

Japan’s high government debt is closely tied to a series of deliberate policy choices. First, to finance its large social security deficit, the Japanese government opted to issue bonds rather than draw down social security reserves. The social security reserves were invested in high-return, risky assets such as equities and foreign bonds, especially after 2012. As a result, despite persistent and significant social security deficits, the social security reserves grew over time—from 36% of GDP in 1997 to around 60% of GDP in 2023. Had the government used social security reserves to cover these deficits instead, the outstanding government debt would be significantly lower.

Second, beyond bond issuance, the central and local governments have historically relied on alternative borrowing instruments, such as loans, or other borrowing channels, such as public financial institutions. Before 2000, the Japanese government borrowed heavily through the Fiscal Investment and Loan Program (FILP), a large government-run lending program.See Takero Doi and Takeo Hoshi’s article “Paying for the FILP,” in Structural Impediments to Growth in Japan, National Bureau of Economic Research Inc., 2003, pp. 37-70. FILP served to finance various public investment projects through targeted loans and was primarily funded by Japan’s postal savings bank and social security fund. By the late 1990s, FILP’s loan portfolio had exceeded 100% of GDP. In the early 2000s, Japan began privatizing the postal savings bank, and FILP’s reliance on it for funding diminished. To sustain FILP operations, the Japanese government increasingly turned to the bond market, which further contributed to the growth of government debt.

The above observations highlight important considerations for accurately assessing Japan’s fiscal position:

• An analysis of the public sector should not be limited to central and local governments. Other government agencies, such as FILP and the social security fund, should also be included.
• Assessing overall liabilities requires examining debt securities as well as other borrowing instruments and channels, such as loans to FILP.
• Government assets and investment portfolios also should be considered—for example, the risky asset holdings of the social security fund.

In short, focusing solely on government debt can provide a distorted picture of public finances.

Novel Findings from Examining Japan’s Consolidated Balance Sheet

Motivated by the above insights, YiLi Chien, Howard Cole and Hanno Lustig’s recent working paper consolidated the balance sheets of Japan’s central and local governments with those of other Japanese governmental agencies, including public pension funds, the Bank of Japan and public financial institutions.See “What about Japan?,” Federal Reserve Bank of St. Louis Working Paper 2023-028C, revised in July 2024. The analysis produced several novel findings.

• First, as of the second quarter of 2024, Japan’s net public liabilities on the consolidated balance sheet amounted to only 78% of GDP. While gross liabilities stood at 270% of GDP, the government also held substantial assets totaling 192% of GDP.
• Second, a significant portion of these assets were invested in high-return, riskier assets such as domestic equities, foreign equities and foreign bonds. Liabilities primarily consisted of low-return instruments like bank reserves and government bonds. This resulted in a return spread between government assets and liabilities. Despite having a net liability position, the high returns on riskier assets exceeded the government’s funding costs, generating a substantial positive return on Japan’s balance sheet.

The analysis showed Japan’s public sector balance sheet earned an annual return that exceeded its funding costs by exceeding 6% of GDP between 2013 and 2023. The large annual net return explains why Japan’s net liabilities have increased at a much slower rate than its government debt.

Notes

1. In this blog post, government debt refers to the total amount of government bonds issued by the central and local governments. The concept of public liability, on the other hand, encompasses not only debt but also other liability instruments, such as loans, held by a broader range of public institutions, including but not limited to social security funds and public financial institutions. As will become clear later, we argue that to analyze Japan’s fiscal situation, one must focus on the consolidated balance sheet of the public sector—considering both assets and liabilities—rather than the narrowly defined government debt.
2. The combination of an aging population and a decline in overall population has resulted in a shrinking workforce, a key factor in Japan’s prolonged economic stagnation. See Jesús Fernández-Villaverde, Gustavo Ventura and Wen Yao’s 2025 article “The Wealth of Working Nations,” in European Economic Review.
3. See Takero Doi and Takeo Hoshi’s article “Paying for the FILP,” in Structural Impediments to Growth in Japan, National Bureau of Economic Research Inc., 2003, pp. 37-70.
4. See “What about Japan?,” Federal Reserve Bank of St. Louis Working Paper 2023-028C, revised in July 2024.