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The difference between Japan and the US -- Sovereign debt

In 1984, the total Japanese sovereign debt as a percentage of GDP was below 20%. At the end of 2024, Japan's sovereign debt as a percentage of GDP was 229%. What happened in these 40 years? Quite simply, the Japanese were the first to employ quantitative easing to turbo-charge economic growth. It all started after the crash of 1987. Japan’s growth had been anchored on an unsustainable real estate market.

Japan, like many Asian countries, is a country of savers. The truth of the matter is, Japanese have consistently saved between 25% and 45% of their income, that money was put in savings accounts and pension designated savings accounts, to be used when they retire. In addition, the Japanese government never eases the rules for pension funds to invest in other things than domestic sovereign debt, or Japanese equities. The truth is, that over 90% of Japanese savings have been funding Japan’s debt. 95% of Japan's sovereign debt is financed domestically.

As of the end of 2024, American sovereign debt was slightly over 100% of GDP. far less than what Japan faced 25 years ago. And there ends the comparison. The reality is over 1/3 of America's sovereign debt is financed by overseas investors. Japanese, Chinese, and a lot of European pension funds, like the liquidity, and the reasonable return that US treasury bills offer.

Strictly speaking, America could easily double its debt to GDP ratio, and still be below Japan’s debt to GDP ratio. And yet the comparison fails. Firstly, America is incredibly dependent on foreigners to finance its debt. Principally, because Americans don’t save. The average saving rate in the United States is less than 5%, and the vast majority of savings are held by the one percent. The second problem, far more important, the absolute size of the US debt financing requirements. Currently, the US borrows  $37 trillion of which almost 15 is financed by foreigners.

The problem is as follows; there’s an absolute limit to the appetite of foreign investors for US debt. However, before they reach their limit, they will ask for high returns. Already, US treasury rates are far more expensive than many other Europeans and Asian countries.

The question therefore is, can America allow its debt to GDP to rise to 229% of GDP? It’s unlikely that the global appetite for US denominated debt will reach that level. Already, there are many signs that institutional investors are looking to diversify away from the US dollar.

Interesting times.


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