Japan's Massive Debt: A Unique Economic Phenomenon

Japan's massive debt, sustained by high savings and money printing, challenges conventional debt sustainability theories.

### Japan's Debt Secret: The World's Most Indebted Country
* 🇯🇵 After World War II, Japan was one of the fastest-growing economies in the world, but in the mid-1990s, it faced a **huge financial and real estate crisis** that led to **stagnant growth**.
* 💰 Despite Japan's debt being equivalent to **258% of its GDP**, it has a very high level of savings, with the government's investments exceeding its debt to private agents by **nearly 10 times**.
* 💸 The common mistake of measuring debt as a percentage of GDP without considering the government's **net worth or real capacity to service its debt** is prevalent when discussing public debt.
* 💸 "What really matters is the **creditworthiness, the ability to pay, the assurance that lenders are given that their money can be repaid**."
* 💸 In Japan, **46% of all government debt is owed to its own central bank**, which prints money to avoid deflation. However, due to a liquidity trap, where people withdraw money from banks due to negative interest rates, the **total money supply does not increase** despite massive money printing.
* 📈 "This policy has other consequences. For example, it **erodes the value of the Yen**, **prevents one of the most thrifty societies in the world from taking advantage of its wealth**, and **promotes economic stagnation**."
* 🏦 "Having reached this point, it's now over to you. Do you think that Japan will be able to **continue to leverage its debt capacity forever**? What do you think is the **fundamental reason that allows Japan to have such a high level of debt**? Would you **invest in Yen or in Japanese debt**?"

hey there visual economic community. In a previous video, we've warned you of a very important danger that we should all be aware of. [Music] The Euro could be in grave danger. What's more, the hypothetical but increasingly less far-fetched fall of the Euro could give way to a huge financial crisis, the financial crisis even bigger than the one experienced in 2008. This could lead to the ruin of several European economies. And why, you may ask, is there so much danger and so much concern about the economic evolution of Europe? Well, as we've already told you here on visual economic, the main reason has to do with the huge public debt incurred by the countries of the South. To be more specific, we are talking about levels of public debt that, in the case of some member countries, have reached 175 percent of gross domestic product, debt that in the absence of a huge adjustment to the Public Accounts will end up being unpayable, which could lead, and I am not exaggerating here, to the bankruptcy of the financial system.

itself. But wait a minute, let's not go so fast. The truth is that there is a sector of economists, or at least a sector of politicians, who argue that there is nothing to worry about. After all, we can find countries in the world that are more indebted than those of Southern Europe and that are not doing so badly. Well, today on Visual Economic, we are going to talk about those countries. In fact, we're going to talk about the country par excellence if we're talking about public debt, the country that is said to have the most indebted government in the world. That's right. In this video, we're going to tell you about Japan. [Music] I want you to take a look at this chart. What you see on your screen is no less than the total public debt accumulated by Spain, Portugal, Italy, and Greece, the countries of Southern Europe. This is the debt that economists are so concerned about and that could cause a global financial cataclysm. But take a closer look on the screen. Take a good look at Japan's debt. That's right, as much as it

may surprise you the Japanese government's debt alone is more than double the debt accumulated by the governments of southern Europe combined according to the oecd. Japan's debt is equivalent to 258% of its entire gross domestic product. Yeah, you heard that correctly, 258%, and yet no one is prophesizing the Japanese collapse. Yes, it is true the Japanese economy has been stagnant for decades and has many problems, but in general, no one thinks that they are heading for a huge financial cataclysm. Mind you, the most curious thing is not only the effects of the Japanese debt do not seem so serious, but also that with the data in hand, the government does not seem overly concerned about the economy continuing to grow. Take a look at this. As you can see in this graph, Japan's deficit has been maintained for more than 25 years at a not inconsiderable rates of between three and eight percent of GDP. And although year after year, they announce intentions supposedly to correct this, everything indicates that the Japanese policy is in favor of not

spending more than they have is neither here nor expected, at least for the time being. Japanese Prime Minister Fumio Kishida announced Friday a plan worth a record 490 billion dollars to revive the world's third-largest economy after the pandemic. So with all this in mind, I think we still have a few questions. How is it possible that Japan is taking on so much debt, and it doesn't seem to worry them in the least? As Japanese debt, the ultimate proof that the European debt shouldn't worry us so much. Or maybe it's that Japan has become special characteristics that many pro-indebted economists curiously forget to mention. Well, today on Visual Economic, we're going to answer all of these questions. And take note because we will tell you things that are not explained in any traditional media outlets and that almost no economist or political scientist takes into account when dealing with the Japanese situation. So if you want to know more in-depth answers about the Japanese case, join us on this journey. Let's get cracking.

[Music] To understand how it is possible for Japan to have such a large debt without going bankrupt, the first thing to do is understand a little bit about its history. And unlike what many of you probably think, Japan was not always the country with the largest debt in the world. Nor, of course, was a country with stagnant wealth as it is now. In fact, after World War II, Japan was something like the perfect example of what a country should aspire to be in economic terms. For years, it was one of the fastest growing economies in the world, and at one point even threatened the dominance of the United States itself as the world's leading economic power. And that is taking into account that we're talking about a country whose population was about half that of the North American Giant. So yes, Japan was doing very, very well. It was going so well that we owe much of Western culture, anime, video games, and the use of a multitude of vehicles precisely to the Japanese. However, in the mid-1990s, an economic bomb exploded in the country.

huge financial and real estate crisis, comparable to that of the 2008, knocked the country out, and no it's not a figure of speech. Since then, wealth in Japan has not managed to grow at all. [Music] I'm sure many of you are now wondering what exactly happened. Why did the Japanese Bonanza completely collapse overnight? Well, this is something we've already talked about at lens on our sister Channel visualpolitik. I'll leave some links Down Below in the description. In any case, what we are interested in knowing about the Japanese crisis of the 1990s is that it was right around that time that this monstrous debt began to take sheep. Since then, as a mechanism to finance the Japanese government stimulus plans, Japanese debt went from an almost irrelevant 38 to the Staggering figure of over 250 percent that we see today. And the quick question is how has Japan managed to run up so much debt for 30 years without going bankrupt along the way. Is such a level of debt sustainable? What on Earth differentiates Japan from

Southern Europe. Let's find out Japanese support. [Music] First of all, let's be clear about one thing. In the traditional media and also from the mouth of certain economists, it is often said that the reason why Japan can get into so much debt without going bankrupt is the following: that the government of Japan owes 46% of all its debts to its own Central Bank. In other words, that it owes money to itself. Or to make it even clearer, that half of its debt is actually owed to no one and therefore technically doesn't exist. This reason, which so many economists have put forward, makes sense, although of course it also has its drawbacks and problems. However, on VisualPolitik, we do not think that this is a fundamental reason why Japan can get so far into debt. Without digging too deep, in Southern European countries, we also find similar situations. For example, more than 40% of the Spanish debt belongs to the European Central Bank. And as we've already explained, this does not mean that Spain can get as indebted as Japan.

in fact, the European Central Bank has already said it will turn off the credit tap to Southern countries. ECB prepares to end debt purchases in the summer due to runaway inflation. No, if the fundamental reason why Japan can have so much debt is not because its debt is owed to its own central bank, then what is it? Well, I think the answer is going to surprise you a lot. Japan is not really practically in debt in net terms. It could be if we take into account future commitments such as future pensions, but then the situation of most countries in the world would also be worse. Let's just say that this is something that is not taken into account when measuring the degree of liquidity or solvency of a country, but let's not get bogged down. Didn't I just say it was the most indebted country in the world? Why am I now seeing just the opposite? Well, the thing is that even though Japan has such a large debt, it also has very, very high savings. It has a gigantic piggy bank, so to speak. Give you

an idea according to the official data for 2019, the financial assets of Japan's central government were equivalent to 624 trillion yen. That's about 4.5 trillion US dollars, a figure to which, in addition, another 117 trillion yen in assets owned by the Japanese Central Bank should be added. In other words, the Japanese government has investments that exceed the debt it owes to private agents by nearly 10. Or to put it another way, if tomorrow the government of Japan was to lose a banknote printing machine with which to repair its debt, it can simply sell its investment in stocks, bonds, and commodities and pay off the debt with the profits. And even then, they would still have money left over. [Music] When talking about public debt, a serious mistake is often made. The mistake of measuring debt as a percentage of GDP without taking into account the government's net worth or a country's real capacity to service its debt. This would be like if we were lending money to someone and we looked at how big

their salary was without taking into account the assets or savings. They have it would be like refusing to lend money to Elon Musk because he doesn't have a high salary. Even though he has millions in Tesla stock, wouldn't that be ridiculous? Well, this phenomenon alone would be enough to explain why countries with less debt than Japan. Such as those in southern Europe or Latin America, have much more problems when it comes down to it. To give an example, in Spain, the public administration not only does not have the resources. But the net saving volumes of households and companies are also much lower than in Japan. At the end of the day, what really matters is the creditworthiness. The ability to pay, the assurance that lenders are given that their money can be repaid. But wait a minute because we're not done yet. There are even more reasons that could explain Japan's ability to sustain its huge public debt. Do you want to know what they are? Of course you do, so let's find out. Printing and grinning. So far we have told you about the debt.

owed by the Japanese government to large investors, small savers, and companies. However, we left aside 46% of all the government debt that the Japanese government owes to its own Central Bank, that which we have said it owns to itself. Well, in this fact alone, there is something that we have to focus all our attention on right now. Check this out. It turns out that all the debt owed by the Japanese government to itself was financed thanks to the central bank printing new money and lending it to the government itself, a printing of new money that, as you can see, has skyrocketed since 2013. And you may ask, what on Earth happened in 2013 to make so many banknotes necessary? Well, actually, it is not that there was a very specific need for financing. In fact, what happened in 2013 was something very curious and something that is seen in very few economies. Japanese Central Bank doubles money supply in fresh bid to spur inflation, that's rate. Unlike other countries in the world that try to control the

printing of new money, in order to avoid inflationary episodes, the Japanese government is pursuing the opposite. As is also the case with Switzerland, Japan has been suffering from continuous deflation for years and years. Deflation that the government authorities want to avoid at all costs. To avoid such sustained deflation, the Central Bank prints money and introduces it into the market through government spending. Or in other words, that the government is not so much borrowing because of a lack of revenue, but rather it is borrowing to try and inflate prices. Now, do you want to know the funniest thing of all? Well, it seems that despite all the massive printing of banknotes that I just mentioned, the Japanese state has not even managed to get the economy to inflate more than one percent over the last few years. Check this out. [Music] After seeing this, I am sure that many of you will not understand anything. How on Earth is it possible that after putting more than six times the amount of money in circulation, inflation has not picked up? Well, you see, the answer to this

question involves a very interesting phenomenon in the economy. The liquidity trap. But what is a liquidity trap? To find out, let's go back for a moment to the chart from before. Foreign, you see, is the money that has been created in the Japanese economy over the last few decades. However, now look at the blue line that appears on the screen. The blue lane is the sum of all the bank deposits owned by the Japanese. And notice that there is one thing that does not add up here. While the money in circulation issued by the central bank has increased more than six-fold, the volume of bank deposits has grown at a rate that is three times lower. I mean, even though there is more money, that money is not in the banks. Isn't that a bit strange? And yes, indeed it is. It's super strange. But this is precisely what the liquidity trap is all about. And the question is, what is the cause of this trap? Well, you see, in essence, this works as follows: Commercial banks multiply money by creating new fictitious money from your credit. That is, if you leave a

hundred dollars in a bank. The bank could convert it into one thousand dollars in deposits. Now, in order for banks to be able to multiply money so much, they must first have money to multiply. In other words, if people withdraw money from the bank in droves, this fictitious money tends to disappear. Hence, when there is a banking panic, banks do not have cash for everyone. And that alone, but in a progressive way, is what has happened in Japan. [Music] Let me explain. Despite the fact that the government has been printing real money by the bucket load, Japanese citizens have been steadily withdrawing their money from the banks, causing the fictitious money created by the banks to diminish. Therefore, if real money increases but fictitious money decreases, then the total money does not increase, and there is no inflation. Now, why do Japanese citizens start withdrawing their money from banks in the first place? Well, because with an aging population and so much money being printed by the central bank, Japanese interest rates ended up generating negative yields. In other words, in order

to have the money in the bank, citizens had to pay the bank. So, in the end, it was more profitable to having the money kept under your mattress. To give you an idea, Japanese families are so fond of cash. That is one of the developed countries that pay the highest percentage of their purchases with ready money in cash. Families hoard a lot of cash. So, the more money the state printed, the more the interest rate was reduced. And the more people took their cash out of the banks, creating a vicious cycle where their total money could no longer increase, no matter how much more was printed. But wait a minute, because that's not all. F flew the quantity trap holds. In theory, Japan could pay its debts by simply printing money, right? In part, yes. Thanks to the liquidity trap, Japan could monetize debt without creating huge hyperinflation like those in Argentina or Venezuela. So, does this mean the Japan can borrow for free, that it has infinite money and resources to do whatever it wants without affecting the economy? Well, there are many

economists who think that yes since Japan can print money without creating inflation, it can do whatever it wants. The problem is that these economists do not seem to mention the obvious. This policy has other consequences. For example, it erodes the value of the Yen, prevents one of the most thrifty societies in the world from taking advantage of its wealth, and among other effects, has caused the country to experience economic problems for 30 years. Foreign, we are, after all, talking about an economy that, precisely because of money printing, got stuck in a huge bubble in the 1990s that destroyed its growth. Not to mention, although inflation is not being generated in Japan, what is happening is that interest rates are artificially low. In other words, if in normal situations a person would receive four to five percent interest for investing this money in bonds, now he or she does not only not receive it but loses 0.1 percent. As you can imagine, this is a total disincentive to investment and further promotes the

stagnation of the country. In short, Japan's ability to monetize debt comes at the expense of its investors and not at the expense of those who hold cash, as is the case in Latin American countries. In artificial inflation environments, those who hold money lose, and in liquidity trap environments, those who invest it lose. In any case, having reached this point, it's now over to you. Do you think that Japan will be able to continue to leverage its debt capacity forever? What do you think is the fundamental reason that allows Japan to have such a high level of debt? Would you invest in Yen or in Japanese debt? You can leave your answers in the comments below. And remember that you can highlight your contributions with the thank you button, and that by doing so, you can also financially support the Independent Media, that is us here at Visual Economic. If you like this video, like it and activate the little bell button down there so you don't miss any of the following videos. All the best, and I'll see you next time. [Music]

How JAPAN endures the world's HIGHEST DEBT WITHOUT COLLAPSING - VisualEconomik EN

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VisualEconomik EN

The Potential Euro Crisis and Japan's Enormous Debt

The Euro is at risk of a major financial crisis due to the high public debt of Southern European countries, potentially surpassing the 2008 crisis.

Japan's government debt is over double the combined debt of Southern Europe, reaching 258% of its GDP, yet it is not facing the same level of concern, as its economy continues to grow despite maintaining a high deficit for over 25 years.

Japan's Staggering Debt and Economic History

Japan has announced a $490 billion plan to revive its economy, despite having the world's largest debt.

After a booming economy, Japan was hit by a major financial crisis in the 1990s, leading to stagnant growth and a sharp increase in debt.

The country's ability to sustain such high levels of debt without going bankrupt raises questions about its unique economic characteristics.

The Real Reason Behind Japan's Enormous Debt

Japan's ability to accumulate massive debt is not primarily due to owing a significant portion to its own central bank, but rather because of its incredibly high savings and investments, which far exceed its debt to private agents.

The country's government has a substantial financial asset equivalent to 624 trillion yen, allowing it to easily pay off its debt with the profits from selling its investments.

This situation highlights the importance of considering a country's net worth and capacity to service its debt, rather than just looking at the debt as a percentage of GDP.

Japan's ability to sustain a huge public debt is not only due to its creditworthiness but also to the fact that a significant portion of the debt is owed to its own Central Bank.

The Japanese government has been aggressively printing new money since 2013 to spur inflation and combat deflation, in contrast to other countries.

Despite the massive increase in money supply, Japan has struggled to achieve significant inflation, raising questions about the effectiveness of its approach.

Understanding the Liquidity Trap Phenomenon

The liquidity trap occurs when despite an increase in real money, the withdrawal of fictitious money from banks by citizens prevents overall money growth and inflation.

In Japan, this was caused by negative interest rates, leading to a preference for hoarding cash.

The liquidity trap has allowed Japan to monetize debt without causing hyperinflation, giving the illusion of infinite resources.

The Impact of Japan's Money Printing Policy

Japan's ability to print money has led to a devaluation of the Yen and hindered the country's economic growth.

The policy has artificially low interest rates, disincentivizing investment and contributing to the stagnation of the economy.

Despite this, the country has been able to leverage its debt capacity, but the sustainability of this approach is questionable, especially in the long term.