When it comes to government debt as a share of GDP, Japan stands alone in the G7.
We all know the chart:
Japan’s eye-watering gross debt load is the principal reason why generations of bond investors tried to make money shorting Japanese government bonds (before reversing the trade just as it would’ve started really paying off).
And if we pop these numbers into toy debt sustainability models, at current market rates fiscal sustainability begins to look . . . challenging:
The fate of Japan — the world’s fourth-largest economy — is important in its own right. But it’s also sometimes seen as a bellwether for the rest of the developed world: its demography, monetary policy, and fiscal largesse have increasingly been followed by others.
And so the St Louis Fed has been helpfully posting blogs and papers about what lessons might be drawn from Japan’s debt-to-GDP for a few years — focusing on the issue of government indebtedness. As they wrote back in 2023:
Due to Japan’s rapidly aging population, economists predicted that the heavy burden of social security expenses would result in a large fiscal deficit, which could then lead to a public debt crisis. However, a crisis has yet to occur.
When examining Japan’s debt-to-GDP, it may therefore seem fair to assume that concerns regarding the U.S.’s high level of debt are overstated.
While it would be fun to see central bank researchers go against type — rubbishing economic doomsayers as chicken-littles, and laying the epistemological ground for another couple of decades of fiscal party time in America — this is not what’s going on. They continue:
. . . a comparison based solely on the debt-to-GDP ratio overlooks several other key factors. A more comprehensive view of the debt issue necessitates an examination of the public sector’s balance sheet as a whole, the level of net liability and the revenue from its asset returns.
In other words, if the Japanese government had raised a bazillion yen on the bond market and funnelled it all into, say, a successful forex trading operation and a long-only stock portfolio which has gone to the moon, maybe we should consider these assets too when trying to work out what sort of parlous state Japan is actually in?
The researchers found that if you consolidated Japan’s whole public sector balance sheet in Q322, the government’s assets and liabilities come to only 119 per cent of GDP. This is still a big number, but it’s less than half the IMF’s gross government debt number. Scary, but not so scary.
What if you did a like-for-like calculation for the US?
The St Louis Fed researchers found that the US had a public sector net liability of exactly the same 119 per cent of GDP. Huh. Being in the same boat as the US might not be the most ringing endorsement of Japanese government finances. But maybe Japan’s debt sustainability challenge isn’t quite as outlandish as we thought?
Tell us about the assets
Japan’s use of government debt — much like Singapore’s, which has gross debt to GDP of 176 per cent — looks through this lens like it has been a cheap way of funding a humungous trading book.
Unlike Singapore, Japan’s net public sector net liability position is in deficit rather than (alleged) overall surplus. But, also unlike Singapore, it has enjoyed spectacular returns on its monster macro punts over the past few years. Alphaville have covered some of these in the past, but let’s recap.
They’ve scored healthy profits on its FX interventions since 1991, which we reckon could be worth around eight per cent of GDP:
The Bank of Japan’s most outlandish version of QQE has involved building a huge position in stocks, and we estimate the unrealised P&L could be worth 11 per cent of GDP:
And that’s before we chalk up jumps in the value of GPIF, Japan’s $1.8tn public pension reserve fund that is maintained to help the government pay pensions. This has benefitted bigly from a combination of a slide in the yen and booming stocks:
Beyond these three, there are a host of other such trades. But pretty much all of them come down to one core basket of positions: short yen vs US dollars, and long stocks. And this trade has been wildly successful.
Of course, Japanese stocks could crash and the yen could soar, wiping out, or at least denting, these gains. But eagle-eyed readers will observe that the market values of all of these positions look bigger in 2025 than they did in 2022 when the St Louis Fed did their calculations. What would Japan’s net debt position look like today?
Some very cool charts
Alphaville prizes itself on an ability to roll up its sleeves and dive into unfamiliar statistical warehouses to extract succulent, chart-appropriate data. But the BoJ’s flow of funds portal is hard work. And successfully parsing the data into a consolidated public sector balance sheet at pace is fraught with methodological peril. So we contacted YiLi Chien, economist and senior policy advisor at the St Louis Fed, and lead author of a series of great papers analysing Japan’s sovereign balance sheet, and begged for help.
Boy, did he deliver.
Using data provided by Chien, we’ve put together this chart of the net and gross positions for each of Japan’s public sector balance sheet elements. Toggle the filter to see how this splits by gross and net position for each element:
What’s the bottom line? Japan’s total net public sector liability had fallen to a mere 65 per cent of GDP by the end of the third quarter of 2025 — the latest date for which we have data. By our back-of-the-envelope estimates, we can knock a good few per cent more off that total given subsequent moves in both stocks and the yen.
Because Chien provided us with such a detailed disaggregation of the balance sheet, we were also able to put together this humdinger of a chart:
Toggle the filter to flip between central government, local government, social security funds, the BoJ, and public sector financial institutions to see how each element’s balance sheet has evolved on a gross and net basis.
In an article for the 2025 Fall edition of the Journal of Economic Perspectives, Chien, along with coauthors Wenxin Du of Harvard Business School, and Hanno Lustig from Stanford, characterises Japan’s strategy as “a sovereign wealth fund with borrowed money”.
They estimate that Japan’s use of “cheap domestic funding to take highly-levered long positions in risky assets” has earned the government “an additional 6 percent of GDP per annum above its funding costs” over the past decade.
SIX PER CENT OF GDP PER ANNUM!
This helps explains how Japan has “managed to defy the standard logic of debt sustainability”, they say.
Can it continue? The trio of researchers reckon yes. Or at least almost. They project “that the consolidated Japanese government could earn an expected return around 3.9 percent of GDP on its current risky portfolio”. though they caveat this by observing that the “ability of Japan’s public sector to sustain high levels of debt depends on stable and low funding costs from bondholders”. So, it depends.
Could the US copy Japan’s path to fiscal sustainability? Only at the cost of the dollar:
The United States faces similar fiscal pressures but is unlikely to replicate Japan’s approach. Unlike Japan, the US government has relied more on external funding to support its deficits. A prolonged policy that sought to help the federal government finance borrowing with below-market interest rates could erode the dollar’s reserve currency status and further diminish the convenience yield on US Treasury bonds.
Given the President’s desire for low rates and seeming ambivalence towards a weaker dollar, anything’s possible.
Correction 08:42 9th February 2026: a previous version of this post listed Harold Cole from University of Pennsylvania as one of the three authors of the Journal of Economic Perspectives article, rather than Wenxin Du of Harvard Business School. Cole coauthored What about Japan? — a fascinating St Louis Fed Working Paper tackling the same topic (with Chien and Lustig). Over-excited by all the data, Toby got mixed up. Sorry.
Further reading:
— When Yenterventions work (FTAV)
— Japan’s finance ministry isn’t a massive macro hedge fund (FTAV)
— What should the Bank of Japan do with its huge stock portfolio? (MainFT)
— Could Singapore’s GIC actually be the world’s largest sovereign wealth fund? (FTAV)
— How Singapore’s wealth fund punted its way to prosperity (FTAV)
— Singapore has lessons for countries worrying about debt (MainFT)