Decoding Japan's Economic Woes: Is It Really Worse Than Greece?

SYNOPSIS

Japan's economy faces a critical juncture, with Prime Minister Shigeru Ishiba warning of a fiscal situation "worse than Greece" due to soaring public debt, rising bond yields, and an aging population. Despite key differences from Greece, particularly in domestic debt ownership, the nation grapples with recession fears and stagflation, demanding urgent structural reforms to avert a deepening crisis.

Decoding Japan Prime Minister's Statement: Is it really Worse than Greece?

The recent statement from Japan’s Prime Minister Shigeru Ishiba has cast a spotlight on the severe economic headwinds confronting the nation. Shigeru Ishiba on Monday warned that “Japan’s fiscal situation is undoubtedly extremely poor, worse than Greece.” This sentence highlights the gravity of the situation, which is primarily centered around the country’s huge public debt, rising bond yields, and sluggish economic growth.

Some of the Key Aspects of this Economic Situation are:

1. High Government Debt:

   
   

   At the time, Japan’s debt-to-GDP ratio had already exceeded 235%, which is one of the highest among other developed economies. This higher debt is driven by an aging population, rising welfare costs, and increasing borrowing expenses.

   
   

   For years, Japan managed this astronomical debt with ultra-low interest rates. However, the Bank of Japan (BoJ) has ended its negative interest rate policy and begun to normalize its monetary policy by gradually increasing its interest rates. This makes servicing the existing debt mountain increasingly expensive. The yields on Japanese super-long government bonds have soared to an all-time high, including a 40-year bond rising 15 basis points to 3.6%, which indicates that markets expect Japan’s economy to worsen in the longer term.

   
   

2. Economic Contraction and Recession Fear:

   
   

   Japan’s economy contracted by 0.2% in the first quarter of 2025 (a 0.7% annualized decline), due to stagnant private consumption and falling exports (-0.6%), inflation also rose by 3.6% in March, suggesting the economy was losing its support from overseas demand much before Trump’s ‘reciprocal’ tariffs. GDP shrinking and Inflation rising have raised concerns not just for potential recession fears but Stagflation as well.

   
   

3. Continuous Demographic Pressure:

   
   

   Japan's aging population is continuously exerting immense pressure on the economy. An aging population drives up social welfare and healthcare costs, contributing to an increase in government spending, and a shrinking workforce results in lower tax revenues and limits economic growth.

   
   

4. The “Worse than Greece” Context:

   
   

   Prime Minister Ishiba’s statement was a strong message against further fiscal expansion like debt-funded tax cuts (reducing taxes by issuing more government bonds to cover the fiscal deficit) when the nation's finances are severely stretched and borrowing costs are on the rise. 

   
   

   However, this is not the first time. In 2010, Japan’s then-Prime Minister Naoto Kan also cautioned that the fiscal situation could spiral into a crisis worse than Greece’s, prompting fears in public trust and the bond market. Fifteen years later, those warnings are back, but the situation has intensified, with a larger debt pile and demographic pressures deepening.

   
   

5. What Makes this Different from Greece:

   
   

   The key difference between the two countries is the ‘Debt Ownership’, Greece had 8 out of 10 euros of debt with foreign bondholders, whereas Japan’s vast majority of debt is with its own citizens, with the Bank of Japan being the highest holder.

   
   

   Also, Japan has around $1.4 trillion of foreign reserves, out of which $1.13 trillion is held as US Treasuries, making Japan the largest foreign investor in the U.S. Therefore, any further default risk would also impact the other countries.

   
   

Future Outlook:

The Future Outlook remains uncertain— with lacking growth drivers and weakness in exports and consumption. Even though Japan may not be on the level of a Greece-like default. But the Prime Minister’s statement indicates a warning that needs to be fixed immediately. The government faces a difficult challenge: stimulating growth while ensuring sustained fiscal discipline and also managing the demographic pressure. However, this could be resolved with structural reforms.    

Harsh Biyani