Freeberg

One of the biggest challenges facing Japan is the level of debt that they've accrued their debt to GDP ratio is currently 263%. They have about 1.3 quadrillion yen of public debt on an annual GDP of about 591 trillion yen. They're currently at the federal level, spending about 20% of GDP per year, 5% of GDP is being spent per year, just on servicing the existing debt.

One of the biggest challenges facing Japan is the level of debt that they've accrued their debt to GDP ratio is currently 263%. They have about 1.3 quadrillion yen of public debt on an annual GDP of about 591 trillion yen. They're currently at the federal level, spending about 20% of GDP per year, 5% of GDP is being spent per year, just on servicing the existing debt.

And that's at interest rates set by the central bank of roughly 0%. So you know, or whatever the market is trading it at, so slightly above 0%. But if the central bank had to start to raise rates, because inflation started to run away, because there's so much again in circulation, there's so much debt outstanding, the federal government would not be able to actually service this debt.

And that's at interest rates set by the central bank of roughly 0%. So you know, or whatever the market is trading it at, so slightly above 0%. But if the central bank had to start to raise rates, because inflation started to run away, because there's so much again in circulation, there's so much debt outstanding, the federal government would not be able to actually service this debt.

So as of March of 2024, the Bank of Japan, the central bank actually holds 53% of Japan's outstanding government bonds. which is equal to about 100% of Japan's GDP.

So as of March of 2024, the Bank of Japan, the central bank actually holds 53% of Japan's outstanding government bonds. which is equal to about 100% of Japan's GDP.

So their central bank has bought the debt that's being issued by the federal government to fund their budget, a large chunk of which right now is being spent just on paying the interest on the debt, while interest rates are close to 0%.

So their central bank has bought the debt that's being issued by the federal government to fund their budget, a large chunk of which right now is being spent just on paying the interest on the debt, while interest rates are close to 0%.

So imagine if interest rates bumped up to one, two, three, four, 5%, as we're seeing with US treasuries, we were recently at a nearly 5% handle on the 10-year treasury. it would become an unsustainable debt burden for the Japanese government to be able to handle that. And a large part of this is being driven by a number of crises that Japan has faced since the early 90s.

So imagine if interest rates bumped up to one, two, three, four, 5%, as we're seeing with US treasuries, we were recently at a nearly 5% handle on the 10-year treasury. it would become an unsustainable debt burden for the Japanese government to be able to handle that. And a large part of this is being driven by a number of crises that Japan has faced since the early 90s.

So there was the financial crisis in 08, there was the nuclear meltdown, there was a couple of earthquakes, tsunamis, and a lot of debt has been taken on to support the country after those crises. But really importantly, and Nick, if you could just pull up this age chart, is the aging of the Japanese population.

So there was the financial crisis in 08, there was the nuclear meltdown, there was a couple of earthquakes, tsunamis, and a lot of debt has been taken on to support the country after those crises. But really importantly, and Nick, if you could just pull up this age chart, is the aging of the Japanese population.

So this chart shows that, and you can kind of see back to 1950 when the average age in Japan was 21 years old. And today the average age in Japan is around 48. You know, in the next decade, it'll be 50, then it'll be 52. So that means more and more people are relying on public pension. Today, 33% of their government spending goes towards their social security programs.

So this chart shows that, and you can kind of see back to 1950 when the average age in Japan was 21 years old. And today the average age in Japan is around 48. You know, in the next decade, it'll be 50, then it'll be 52. So that means more and more people are relying on public pension. Today, 33% of their government spending goes towards their social security programs.

In the US for comparison, social security is about 20% of federal spending. So that number is only getting bigger and bigger. As the population ages, the Japanese government has to continue to service their older population And they've had to face several crises. Their debt has ballooned to a level that is well beyond any other industrialized nation.

In the US for comparison, social security is about 20% of federal spending. So that number is only getting bigger and bigger. As the population ages, the Japanese government has to continue to service their older population And they've had to face several crises. Their debt has ballooned to a level that is well beyond any other industrialized nation.

And the only way to continue to service that debt economically is to keep interest rates low. And the problem with keeping interest rate low? Inflation. And that's the big driver that caused them to say, let's uptake the interest by 15 bps or 25 bps is to try and tackle the inflation problem they're facing, just like our central bank recently tried to do the same.

And the only way to continue to service that debt economically is to keep interest rates low. And the problem with keeping interest rate low? Inflation. And that's the big driver that caused them to say, let's uptake the interest by 15 bps or 25 bps is to try and tackle the inflation problem they're facing, just like our central bank recently tried to do the same.

But clearly the market can't have it. So Japan is in a real pickle. And I think that it shows how much having a large amount of federal debt can impact the ability for a nation to maneuver itself during difficult times. And ultimately, debt payments come due. They come due either in the form of economic contraction or massive taxes or inflation.

But clearly the market can't have it. So Japan is in a real pickle. And I think that it shows how much having a large amount of federal debt can impact the ability for a nation to maneuver itself during difficult times. And ultimately, debt payments come due. They come due either in the form of economic contraction or massive taxes or inflation.