Japan’s Soaring Debt Forces Tough Economic Decisions Ahead of Key Election

Japan, carrying the largest government debt among major economies, is encountering growing difficulties in maintaining its previous levels of public expenditure.

For years, debt-backed public spending, supported by ultra-low interest rates, has been a key strategy to tackle various national issues. From providing substantial support to struggling farmers and depopulated rural areas to delivering pandemic relief, government outlays have expanded to include increased defense budgets and subsidies aimed at easing inflationary pressures on consumers.

This spending trajectory has persisted even as the demand for social security funding surges to accommodate Japan’s aging population. Currently, government debt has surged to nearly $9 trillion, exceeding twice the nation’s economic output.

As the country approaches a fiercely contested summer election, the ruling party faces escalating demands to incur additional debt. Small enterprises impacted by U.S. tariffs are pressing for financial assistance, while households burdened by rising living costs are calling for tax relief.

However, with the Bank of Japan signaling a shift away from its long-standing negative interest rate policy, which previously enabled easy government borrowing, fiscal constraints have become more pronounced.

Recently, the Japanese government bond market has shown signs of investor unease regarding fiscal sustainability. Yields on long-term bonds, which reflect confidence in the government's repayment ability, climbed to record highs last week. Additionally, weaker demand at a 40-year bond auction further heightened market apprehension.