Japan carries the heaviest public debt burden of any advanced economy, at well over twice its annual economic output. For years, this has been manageable partly because low inflation allowed interest rates to be kept low. However, as higher inflation in the 2020s has led to pressure to normalise monetary policy and as borrowing costs have risen, questions about Japan’s debt sustainability have reemerged.
Our upcoming research shows that in realistic growth scenarios, Japan’s debt will not stabilise on its own. It requires sustained structural primary budget surpluses – budget surpluses before interest payments and filtering out temporary economic fluctuations. The question is no longer whether adjustment is needed, but how the Japanese government can achieve it.
Japan’s fiscal challenge is as much about governance as it is about macroeconomic conditions. Japan has a fiscal rule, but targets have been repeatedly missed or postponed, and enforcement has been limited. Without independent oversight, there is little to stop policymakers from relying on over-optimistic growth forecasts in their debt projections.
The risk is that this leads forecasts to mask the true scale of the public debt challenge and reduces pressure to act. In other words, debt sustainability in Japan hinges not only on macroeconomic conditions but also on the credibility of growth forecasts and the government’s ability to maintain fiscal discipline over time.
Stabilising debt will require sustained primary budget surpluses and stronger institutions to make fiscal commitments credible. Strengthening fiscal institutions, particularly by creating an independent fiscal council, could support debt stabilisation. Empirical evidence shows that countries relying on such independent institutions tend to more effectively scrutinise government forecasts and assess compliance with fiscal rules. These bodies do not make policy, but they constrain unrealistic assumptions, increase transparency and can help keep policymakers attentive to fiscal realities.