Why Japan's Economy Isn't as Strong as It Seems

Japan's bubble economy (1986-1991). A fever dream of Gucci-clad salarymen, gold-wrapped sushi, and nightclubs where champagne flowed like tap water. Land prices soared to absurdity — the land in Tokyo's Imperial Palace was briefly worth more than all of California. Companies lavished employees with first-class junkets and bonuses fat enough to buy Porsches. Wall Street quaked as Japanese investors swallowed Hollywood whole. At the time, the Nikkei Stock Index sat at an all-time high of 38,957.44.

Fast forward 36 years. The Nikkei Stock Index has surpassed 40,000. Yet wages are stagnant, the cost of living keeps rising, and contract work has largely replaced full-time employment. Young people cannot afford marriage, children, or homeownership, while retirees are forced to keep working into their 70s as pensions fall short.

Since the bubble collapsed in 1991, the Japanese government has prioritized tax increases and achieving a fiscal surplus in its primary balance. But has this obsession with balancing the books actually improved the lives of ordinary people — or just deepened the economic malaise?

*Monitors show the Tokyo Stock Price Index (TOPIX) and the Nikkei Stock Average hitting their all-time closing highs on July 4. In Tokyo's Chuo Ward. (©Kyodo)*

The Myth of National Debt

Japan's debt-to-GDP ratio is often cited as a sign of economic crisis. Its GDP is around ¥550 trillion JPY ($4.71 trillion USD), and government debt exceeds ¥1,100 trillion ($7.4 trillion). This puts Japan's debt-to-GDP ratio at approximately 255% — the highest among 172 countries. In comparison, the United States' ratio is about 126%.

Critics argue that such a massive debt burden necessitates tax increases and fiscal restraint. However, national debt does not function like individual or corporate debt. Unlike businesses or households, which must repay their loans or risk bankruptcy, governments that issue their own currency operate under entirely different rules.

Understanding Debt in Macroeconomics

A nation's economy consists of three major players: households (individuals), corporations, and the government and central bank. From a microeconomic perspective, debt must be repaid.

However, on a macroeconomic level, sovereign debt is not the same as corporate or household debt. Japan's government can issue yen indefinitely and refinance its obligations over time. Government bonds do not need to be "paid off" like private loans. Rather, they are continuously rolled over. In practice, Japan has been issuing new bonds to replace old ones for decades.

No Greek-Style Crisis for Japan

Skeptics such as businessman Adair Turner have compared Japan's situation to Greece, which defaulted on its debt in 2015. However, the two cases are fundamentally different. Greece uses the euro and does not control its own currency. When debt repayments were due, Greece could not simply issue more euros — it had to earn them through trade or borrowing, leading to financial collapse.

Similarly, critics cite Russia's 1998 default and Argentina's financial crisis in the early 2000s. However, both countries had issued foreign-currency-denominated bonds (in US dollars), which they could not print themselves. When their economies faltered, they were unable to repay these debts. Japan, by contrast, issues bonds in yen, a currency it can always create.

Japan's Debt vs Other Countries

While Japan's debt has doubled in recent decades, other nations have seen even more dramatic increases. Since 2001, the United Kingdom's debt has skyrocketed, growing more than sevenfold, while the US has seen a sixfold increase. In contrast, France and Canada have experienced a threefold rise. Meanwhile, Germany, Italy, and Japan have had relatively slower debt growth, roughly doubling over the past 23 years.

If debt growth were the primary driver of currency depreciation, the US dollar should have weakened as well. Instead, the dollar has remained strong.

Wage Gap and Economic Reality

Two of the most pressing economic concerns in Japan today are inflation and wage growth, both of which directly impact people's purchasing power.

Nominal wages refer to the gross salary amount shown on payslips, while real wages account for inflation and reflect the actual purchasing power of a worker's income. When inflation rises faster than nominal wages, real wages decline, reducing the standard of living and fueling economic insecurity.

Former METI Minister Yasutoshi Nishimura, former Chief Cabinet Secretary Hirokazu Matsuno, and former Minister for Consumer Affairs Taro Kono meet to discuss the problem of price increases and inflation. May 16, 2023, at the Prime Minister's office. (© Sankei by Ataru Haruna)

Although nominal wages in Japan have risen, real wages have been declining for years. When inflation outpaces wage growth, purchasing power shrinks. Since 55% of Japan's GDP comes from consumer spending, a decline in real wages directly weakens the economy.

Rising stock prices and corporate profits might suggest that Japanese businesses are thriving. However, beneath the surface, many small and medium-sized enterprises (SMEs) are struggling. SMEs employ 70% of Japan's workforce. In 2024, the number of SME bankruptcies reached around 10,000. As bankruptcies rise among these firms, workers naturally suffer.

Contradictions in Economic Policy

Japan's government has acknowledged that economic insecurity discourages young people from starting families. Some view this as contributing to declining births. In 2023, former Prime Minister Fumio Kishida finally pledged to implement "unprecedented measures" to combat the crisis.

However, rather than implementing tax cuts or financial support, the government introduced a child support fund, increasing insurance premiums by ¥500 ($3) per month.

This directly contradicts the analysis that identified economic hardship as a factor in declining births. According to data from the Ministry of Health, Labor and Welfare, a total of 720,988 children were born in Japan in 2024, including foreign nationals. The number of births for 2025 is expected to drop below 700,000 in 2025. Rather than easing financial burdens, the policy exacerbates them, making it even harder for families to thrive.

Regarding consumption policy, efforts to stimulate spending are undermined by raising the consumption tax, which discourages consumer activity and slows economic growth.

As financial analyst Kohei Morinaga suggested, such contradictions arise because "policymakers do not seem to understand money and taxation at a fundamental level." It will probably be a while before we see the gold-wrapped sushi again.

Author: Daniel Manning