Thread by @LogWeaver

Japan’s economy defies every rule in the book:

• Debt over 250% of GDP.
• Decades of near-zero growth.
• No economic collapse.

Here’s the story of Japan’s economic paradox—and what it teaches about modern finance:

Japan's debt crisis is rooted in the 1990s economic bubble burst.

The 1980s saw rapid economic growth, fueled by speculative real estate and stock market investments.

This led to:

• Asset bubble: Property and stock prices soared beyond sustainable levels.
• 1990 crash: The bubble burst, wiping out trillions in wealth.

To stabilize the economy, Japan's government embarked on massive fiscal stimulus programs:

• Infrastructure projects
• Bailouts for banks and companies
• Social spending to support the aging population

These programs were financed by borrowing, leading to an ever-growing debt pile.

Japan has one of the world’s oldest populations, with over 28% of citizens aged 65 or older.

This creates significant challenges:

1. Healthcare & pensions require more funding
2. Fewer workers mean less tax revenue

Therefore, the government relies heavily on borrowing to fund its obligations.

Despite its staggering debt, Japan has avoided an economic collapse.

Here’s why:

a) Domestic Ownership of Debt

Over 90% of Japan's debt is held domestically by:

• Japanese banks
• Pension funds
• Insurance companies

This internal ownership reduces exposure to foreign investors, making Japan less vulnerable to external shocks.

b) Low Interest Rates

Japan's interest rates have been near zero for decades.

The central bank (Bank of Japan) actively manages this through:

• Yield curve control: Keeping 10-year bond yields at or near 0%.
• Massive bond purchases: The Bank of Japan owns over 50% of all government bonds.

Low rates make borrowing sustainable despite high debt levels.

c) High Savings Rate

Japanese households and institutions are known for their high savings rates, providing a steady stream of capital for the government to borrow.

Japan’s economic stability comes at a price.

The measures keeping the debt crisis in check have side effects:

• Zombie companies: Easy credit props up unprofitable businesses, reducing overall economic efficiency.

• Stagnant growth: Decades of low interest rates have failed to spur significant economic growth or productivity gains.

• Weakened yen: Aggressive monetary easing has devalued the yen, making imports more expensive.

Japan’s debt paradox offers valuable lessons:

a) Debt Dynamics Are Complex

High debt-to-GDP ratios don’t always spell disaster.

The structure and ownership of debt matter as much as the amount.

b) Central Banks as Stabilizers

Central banks can play a pivotal role in managing debt crises by buying government bonds and controlling interest rates.

However, this can’t go on forever without risks.

c) Demographics Are Destiny

An aging population is a ticking economic time bomb.

Countries must prepare for the financial burdens of an older society.

d) Growth Isn’t Everything

Japan’s focus has shifted from growth to stability.

While this approach avoids crises, it also limits potential upside.

Economists debate whether Japan’s approach is sustainable. Key risks include:

• A loss of confidence: If domestic savers lose faith in government bonds, Japan could face a funding crisis.

• Global economic shifts: Rising global interest rates could force Japan to adjust its policies, increasing borrowing costs.

• A shrinking tax base: As the population ages further, tax revenue will decline, adding more pressure on public finances.

Japan's government continues to experiment with policies like:

• Increasing immigration to counteract population decline.
• Investing in automation and robotics to boost productivity.
• Gradual fiscal consolidation to stabilize debt growth.

What do you think about Japan’s economic paradox?

If you want investing strategies powered by the best insights and historical precedent,

Join Surmount and start automating your investments:

surmount.ai/strategies