Japan's debt is far larger than ours, so why has it not collapsed yet

If you argue about the national debt long enough, someone will lean back, smile, and say the magic word: Japan. Their debt is over twice the size of their economy, he will tell you, and the sky has not fallen, so relax. It is the kind of argument that sounds devastating until you ask a second question, which is why the sky has not fallen. Then it turns out that the answer is a list of reasons, and that most of them are not available to us.

I want to take the Japan argument seriously, because it is the best card the deficit doubters hold. They are right about one thing: a very high debt does not produce a crisis on a schedule. They are wrong about what that proves. Let me show you the arithmetic and the mechanism, and then you can decide whether to relax.

Terms first

Debt is the total amount a government owes because it has borrowed. GDP, gross domestic product, is the value of everything an economy produces in a year. Debt-to-GDP is the first divided by the second: a measure of how large the burden is relative to the capacity to carry it, the way a mortgage is measured against income. Gross debt counts everything the government owes, including to its own agencies. Net debt subtracts the financial assets the government holds. The two measures can be far apart, and anyone quoting a Japan figure should say which one he means.

The claim of this post, stated plainly: Japan's experience shows that a country can carry a very large debt for a long time under particular conditions, but it does not show that debt is harmless, and the conditions that have protected Japan do not describe the United States.

The figures, and how to check them

Japan's government gross debt has been above 200 percent of its annual economic output for years, which makes it the largest among the major advanced economies. The International Monetary Fund publishes the figure each year in its World Economic Outlook and Fiscal Monitor, and Japan's Ministry of Finance publishes its own debt data. I will not quote a figure to the decimal here, because the numbers move and the series differ, and you should look them up from those sources. The point holds on any version of the data: Japan owes more than twice what its economy produces in a year.

For the United States, the Treasury's Debt to the Penny reported total public debt of $40.56 trillion on November 5, 2026. That total includes money the government owes to its own trust funds, such as Social Security's. The part held by the public is smaller. Either way, and depending on which measure and which year of output you use, the American ratio is well above 100 percent. You can follow the running total at the national debt clock.

So the Japan defender is right that Japan's ratio is higher. Now we have to explain why that has not produced the crisis the textbooks predict.

Premise one: Japan's lenders are Japan

The most important fact about Japanese government bonds is who owns them. The overwhelming majority of Japanese government debt has been held inside Japan: by banks, insurers, pension funds, households and, as I will explain, the central bank. Foreign holders have owned a small share.

This matters for a simple reason. A creditor who lives in the same country as the debtor is less likely to bolt. Japanese savers have a long history of high savings and a strong preference for safe, local assets. For decades the country ran large current-account surpluses, which means it earned more from the world than it spent, and became one of the largest net creditors on the planet. When your government owes money mostly to your own citizens, a run is harder to start, because the people holding the bonds also pay the taxes that back them, and they have few attractive alternatives.

Premise two: the central bank bought the bonds

The second fact is the Bank of Japan. After the collapse of the asset bubble in the early 1990s, Japan entered a long stretch of weak growth and falling or flat prices. The Bank of Japan cut interest rates to near zero and then bought government bonds in enormous quantities. In 2016 it formalized a policy called yield-curve control, which set a target for the yield on the ten-year government bond near zero and committed the bank to buy whatever it took to hold it there. That policy was wound down in 2024, when the bank moved away from negative rates and from capping yields.

Think about what that meant. The government was borrowing, and its own central bank was a very large buyer of the borrowing, holding about half of the outstanding bonds by the early 2020s. This is a form of monetizing the debt. The bank created the money to buy the bonds, and the government in effect owed a large part of its debt to itself. In that sense, a good part of the Japanese debt has been quietly held inside the state's own balance sheet, where it cannot demand repayment on a Tuesday.

Premise three: low rates, low growth, deflation

The third fact is the interest rate. The cost of carrying a debt is the debt times the rate. Here is the arithmetic, using round numbers labelled as hypothetical so no one confuses them with a forecast.

• Suppose a country's debt is 250 percent of its GDP and the average interest rate it pays is 1 percent. The interest bill is 250 × 0.01 = 2.5 percent of GDP.
• Suppose another country's debt is 120 percent of its GDP and its average rate is 4 percent. The interest bill is 120 × 0.04 = 4.8 percent of GDP.

The country with the smaller debt pays nearly twice as much to carry it. That is the secret of Japan's survival: a ratio that looks terrifying is bearable if the rate is close to zero. And the rate was close to zero because of the very conditions that make Japan a warning. Prices were flat or falling for long stretches, which is the sort of environment in which investors accept a tiny return on safe bonds. The economy grew slowly. The population has been aging and then shrinking. Those are not the conditions anyone should wish for. They are the cost of the low rate. Japan did not avoid the bill. It paid in a different currency, which was decades of slow growth.

Premise four: the lost decades are the price

This is the part the doubters skip. If you want to say that Japan proves debt is harmless, you must explain why the Japanese economy has grown so much more slowly than its neighbors since the early 1990s, and why the government has been unable to run anything like a normal fiscal policy. Year after year, Tokyo has used borrowing to prop up demand, and year after year the growth has not come. Debt did not cause the stagnation alone. Demographics, the bank crisis of the 1990s and policy errors all played a part. But a nation that has borrowed more than twice its output to produce those results is not a model to copy. It is a patient on a very long drip.

There is also a risk that the low-rate world conceals: it can end. When rates rise, the interest on a very large debt rises with them, because the old, cheap bonds mature and are replaced with new, dearer ones. Japan has been exposed to just that adjustment as it leaves the era of yield-curve control. Whatever happens next, the point is that the low rate was a condition, not a law of nature.

The steelman

The strongest version of the doubter's case is this. A country that issues debt in its own currency cannot be forced into default in that currency, because it can always create the money. Therefore the true limit on borrowing is inflation, not solvency, and a country like Japan, where inflation was low for decades, had no reason to stop. Meanwhile, the government's debt is the private sector's savings: every yen of bond is a yen of somebody's asset. Therefore, the doubter says, Japan's experience shows that the fear of debt is an accountant's phobia.

I accept the first claim. A currency issuer cannot be forced to default in its own currency in the technical sense. But I reject the conclusion, for three reasons. First, "can always create the money" is the same sentence as "can always inflate the currency." The limit moves from solvency to purchasing power, and that is a limit all the same. Anyone who lived through the American inflation of the 1970s, which is the subject of The Great Inflation of the 1970s was a policy choice, not bad luck, knows what happens to a family when the limit is reached. Second, the doubter's logic proves too much. If debt costs nothing, why tax at all? The theory behind that position is examined in Modern Monetary Theory says deficits do not matter, and 2022 answered it. Third, Japan's low-inflation decades were not a gift of the debt. They were a feature of the same stagnation I just described.

Premise five: why America cannot count on the same luck

Now we come to the comparison that matters. Let me number the differences, because there are four of them and each is serious.

1. Who holds the debt. Japan's debt has been owned overwhelmingly by its own citizens and institutions. A significant part of the American debt held by the public is owned by foreign investors and foreign governments, whose appetite for it depends on their own interests. A lender who lives abroad can stop lending without worrying about his own neighbors.
2. What the currency does. The dollar is the world's main reserve currency, which means that it is used in global trade and held by central banks, and that creates a constant demand for Treasury securities. That is a real advantage, and it is why the United States has been able to borrow so cheaply. But it is a privilege that rests on confidence, and confidence is the kind of thing that does not announce when it is leaving. Japan's position does not depend on the world's central banks. Ours does.
3. The growth and demographics. Japan's low rates were bound up with an economy that was not growing. America's economy has grown faster, and with a higher birth rate and more immigration the population has not shrunk. That means our rates have been higher, which means that carrying a given debt costs more. The arithmetic above shows what that does: at the same ratio, a higher rate means a larger interest bill. See the worked figures in do the arithmetic on $40 trillion and the interest bill it carries.
4. The central bank cannot do the same trick forever. The Federal Reserve bought large quantities of Treasury securities in the years after 2008 and again during the pandemic. The experience that followed is on the record: when the money supply rose far faster than output, inflation followed, and the Fed had to raise rates to bring it down. Japan could run its experiment for a quarter century because inflation stayed low. We could not.

The lesson is that Japan has not discovered a way to borrow without cost. It has found a way to defer the cost, by paying in stagnation and with the central bank as banker of last resort, in a society that happens to save a great deal. We should be very careful about copying a strategy whose price was thirty years of going nowhere.

What a crisis looks like when it comes

Debt crises are not gradual. They tend to arrive suddenly, when a market that has been willing to lend decides it is not. We have an example from a country close to our own: in September 2022, the British government announced a package of unfunded tax cuts, and the market for British government bonds sold off so violently that the Bank of England had to step in to stabilize it. Britain's debt was nowhere near Japan's. What mattered was that investors lost confidence in the plan. A government that borrows a great deal is relying on the market's goodwill, and goodwill is not something one can audit.

That is the answer to the smile. Japan has not collapsed, and good for Japan. But a person who has driven for years without an accident has not proved that seat belts are unnecessary. And America is not driving Japan's car.

The Founders and borrowing

Alexander Hamilton, who built the country's credit, argued that public debt, if it is honestly managed, can be a source of strength, and that the way to treat it is to pay interest faithfully and to avoid excess. That is the subject of Hamilton's 1790 Report on Public Credit and what honest borrowing requires. Thomas Jefferson went further and wrote that each generation should bear its own burdens. You can disagree about which of them was right. But both of them took it for granted that the debt was a promise, that promises must be kept, and that a free people should be wary of a government that spends the money of those who are not yet born. The Constitution gives Congress the power "To borrow Money on the credit of the United States," in Article I, Section 8. It does not say that Congress is wise to use it without limit.

The case in brief

1. Japan's government debt, well over 200 percent of GDP, has not produced a crisis, and the honest explanation is a list of conditions: domestic holders, a central bank that bought the bonds, near-zero rates, and decades of slow growth.
2. The low rates were bound up with deflation and stagnation, so the real price of Japan's borrowing was paid in lost growth, not avoided.
3. Interest cost equals debt times the rate, so a lower ratio at a higher rate can cost more than a higher ratio at a lower rate, as the arithmetic shows.
4. The United States relies on foreign buyers and on the dollar's reserve role, grows faster and has already shown that central-bank money creation brings inflation.
5. Therefore Japan is not a reason to relax. It is a reason to know which conditions you are counting on, and to notice that we do not have them.

What you can do: open the national debt clock, note the figure, and ask your representative in writing what interest rate the budget assumes, and what happens to the interest bill if it is two points higher.