So we get an interesting picture as we think of a Japan struggling to grow, struggling to get back to growth after those very fast rates of the late 20th century. And we see that fiscal policy has been trying to stimulate growth. It looks like that anyway. Of course, you know that when the government spends more than it takes in in taxes, it will have to borrow the money, as we mentioned with the United States. So, let's have a look at Japan's debt and see if we see it rising with this constant deficit spending to try to stimulate the Japanese economy. In fact, we see that Japan has a debt that we can only call alarming. The Japanese government debt as a percentage of GDP, which is the only way to think about it, you take the government's debt, you divide it by the GDP of the country, this gives you a sense of its importance to the country, and you can see that Japan's debt, as a percent of GDP, actually is more than 200 percent. Now we mentioned, 104, 107 for the United States. Here we're talking about a debt that's more than twice that of the United States, as a percent of Japanese GDP. In fact, if we look at Japan's debt and we compare with other countries, again taking debt, dividing it by nominal GDP, which is the only way to be able to compare countries and time series, we see Japan has the highest public debt in the world as a percent of GDP. It's way ahead of a country that we would think of as having a very problematic debt, which is Greece, and we know they've had a debt crisis. It's way ahead of a country that has a chronic debt, which is Italy, and of course, it's far beyond the United States as we just mentioned. So, this is an extremely high public debt. Now, is that enormous public debt a problem? Well, as we mentioned in the last session, we ask ourselves several questions when we're thinking about whether a country has a public debt problem. We ask ourselves, how large is it as a percent of nominal GDP? We've already seen it's very, very large. Okay. Second question we ask is, in what currency is that debt, in what currency is it denominated? In the US case, it was all dollars, and in Japan's case, it's all yen. So that's an advantage because you don't have any currency risk with your debt. The third question is, how much does it cost to finance it? We'll turn to that one in just a minute, and see whether it's an expensive debt for Japan to finance. Then we also ask ourselves, why did that debt rise? Now, we've seen the reason, we've seen that the country has been in a long recessionary gap. It's had trouble getting growth, and so the government is trying to stimulate the economy through fiscal policy and that would be the reason or a reason for the rising debt. But, finally, the bottom line we would want to come to is, is that debt sustainable, and is it repayable? In Japan's case, we're not really sure the answer to that question because no country has experience in modern times such a large debt. But let's have a look at what it costs Japan to finance this debt, and you will get a really surprising picture. Have a look at the axes of this graph. We looked at a picture like this with the United States yesterday, but we were talking about whole numbers, so one percent of GDP, two percent, three percent. Look at the axes of this graph. We don't get to one percent on the entire graph. So, the message is it costs Japan very, very little to finance its debt. In fact, there's a year there where the cost of financing in net terms is actually negative. Now, if it cost you that little to borrow money, wouldn't you borrow? So, one of the interesting conclusions we come to, especially with Japan but also looking at the United States, is that maybe these countries have such a large debt just because they can. If interest rates were high, if there were some other constraint, maybe they wouldn't borrow so much. Another question we might ask ourselves when we're thinking about whether debt could be destabilizing for a country, we might ask ourselves not only in what currency is it denominated, but who owns it? Is it foreigners, or is it people in the domestic economy? Because if foreigners own lot of your debt, maybe they'll become alarmed about you and they'll sell it, and then there will be turmoil in debt markets, right? But in Japan's case, they own almost all of their own debt. In fact, when we look at Japan, we see that actually the central bank owns a very large proportion of the Japanese debt. On this chart, I contrast how much the central bank owns in the United States of debt, which is over on the right, and how much the central bank owns of the debt in Japan, and the difference is striking. So, the central bank is a big owner of Japanese debt. They are not likely to run for the exits if there's some sort of a debt scare in Japan. So in that sense, the fact that the Japanese own most of their debt, and an authority like the central bank has such a large portion of it, means that that debt market will be more stable, and therefore you can finance yourself more easily.
