The Burden of the Debt Depends on How You Measure It

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Tuesday, 22 January 2013 05:26

A Reuters article in the NYT told readers that:

"Japan's public debt burden is already the worst among major economies at more than twice the size of its $5 trillion economy."

While Japan does have the highest ratio of debt to GDP among wealthy countries, it also has one of the lowest ratios of interest to GDP. Its net interest payments are less than 1.0 percent of GDP. This number would be even lower if payments made to the central bank were subtracted out. (These are refunded to Japan's treasury.) By comparison, the interest burden in the United States is currently around 1.5 percent of GDP (approximately 1.0 percent after subtracting out money refunded by the Fed). It had been over 3.0 percent of GDP in the early 1990s.

The piece also warned that continued large deficits could raise interest rates and slow the economy. Actually this depends on what happens to the inflation rate. Japan has had near zero inflation or modest deflation for much of the last two decades. If interest rates rise, but the inflation rate rises by more, as is the explicit policy of the government, then real interest rates would decline. This would boost growth in Japan.