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Is Japan’s Debt Strategy Relevant for the U.S.?

YiLi Chien, an economist at the St. Louis Fed, defines and discusses national debt levels in Japan and the U.S. Although Japan has a higher debt-to-GDP ratio, understanding the country’s national debt requires a closer look at Japan’s assets, liabilities and national strategy for sustaining its debt. The views expressed in this video do not necessarily reflect those of the St. Louis Fed or the Federal Reserve System. Learn more: https://www.stlouisfed.org/on-the-eco... 00:00 - Summary of U.S. debt 00:55 - Summary of Japan's debt 01:33 - How does Japan sustain its high debt? 02:27 - Effects of Japan's debt strategy Follow us: X/Twitter:   / stlouisfed   Threads: https://www.threads.net/@stlouisfed Instagram:   / stlouisfed   LinkedIn:   / stlo.  . Facebook:   / stlfed   Transcript: The current US debt is around 120% of GDP. This is high in terms of historical standards.mEven after the expense of World War II, the US debt-to-GDP ratio in 1945 was only 113%. And 20 years ago, the ratio was only 56%. US debt is likely to be even larger in the next few decades. The congressional budget office predicts that the US will keep running large deficits, around 3% of GDP each year. These persistent deficits, which will increase the debt, are in part caused by higher social security payments and medical care costs due to the aging population in the US. Can the US sustain these deficits and high debt? Japan is an interesting case to look at. The challenges faced in the US today are similar to those of Japan 20 years ago. Japan’s national debt ratio has been high for decades: It was well over 100% 20 years ago and is more than 220% currently. Yet they have no debt crisis and inflation remains low. So, is the US debt level a cause for concern? If Japan can sustain its debt, why can’t the US? How is Japan sustaining its debt? First, the Japanese government has a large amount of debt, but also holds a large amount of assets, more than 100% of GDP. As a result, the net debt-to-GDP ratio is much lower, only around 120%. In addition, its asset return is much higher than the payments on its liabilities. Essentially, the Japanese government implemented a “carry trade” strategy to earn a higher return on its risky investments and borrow cheaply domestically. In contrast, the US government does not hold much in assets. And the return on its assets is similar or even lower than its payments on its liabilities. Could the Japanese strategy work for the US? Maybe not. In Japan's case, the low interest rate policy acts like a regressive tax-transfer policy. It hurts poorer and younger households (who keep their wealth in bank accounts) and benefits older and richer households (who use more investment options). As a result, this strategy might not be ideal for the United States. My name is YiLi Chien, economic policy advisor at the St. Louis Fed. Visit stlouisfed.org for more information.