Korea vs Japan — National Debt

Why Japan is at 262% and still not in crisis

Japan's gross general government debt stands at 262% of GDP, far and away the highest in the developed world — more than five times Korea's D1 (45.8%). On that number alone Japan should have defaulted several times over. In practice its government bond yields stayed among the lowest in the world for decades.

The decisive difference is who holds the bonds. More than 85% of Japanese government debt is held domestically, and a large share of that sits directly on the Bank of Japan's balance sheet. Debt issued in your own currency and held by your own residents does not produce the foreign-exchange shortfall that causes sovereign default. The party the government must ultimately repay is its own households and its own central bank.

Gross and net debt tell different stories

The 262% figure is gross. The Japanese government simultaneously holds enormous financial assets. Net of pension reserves, foreign exchange holdings and stakes in government-affiliated financial institutions, the ratio falls to 155%. More than a hundred percentage points move on a single accounting choice.

That does not make net debt the "true" number. Much of the government's financial assets are held against future pension obligations, so they are not free cash available to retire debt. It is safer to treat gross as an overstatement and net as an understatement. The same principle applies when comparing Korea with Japan: compare gross with gross and net with net, because mixing the two bases can reverse the conclusion.

Could Korea follow Japan's path?

The argument that "Japan is at 262%, so Korea at 46% has room" holds only if the two countries face the same conditions. The yen sits in the basket of international reserve currencies and is bought as a safe haven during crises. The won is not. When external shocks hit, the yen has repeatedly tended to strengthen while the won weakened.

Nor does Korea share the structure in which household savings absorbed government bonds. Korean households are less a net-saving sector than a borrowing one, carrying debt worth 90% of GDP. The depth of domestic capacity to buy government bonds is simply different. And because Korea is ageing faster, it may reach in a shorter span the point Japan took thirty years to arrive at. Japan's 262% is less a licence for comfort than a warning about the timetable.

Interest arrives before the stock does

The number most often cited in debt-crisis discussion is the stock relative to GDP, yet what usually binds fiscal management first is the annual interest bill. The stock has time until maturity; interest leaves the budget in cash every year.

One of the conditions under which Japan has carried 262% was ultra-low rates. When rates sit near zero, no matter how large the stock, interest outlays stay within a controllable range. Once rates normalise, the interest on that same stock multiplies. The shift in Japanese fiscal debate from stock to interest reflects exactly this change.

Korea has a lower stock ratio but spent long periods with higher rates than Japan. Measured as interest burden relative to the stock, the gap may not be as wide as the ratio gap suggests. Looking only at the stock hides this when comparing the two.

In practice there are three indicators to check: interest as a share of total spending, interest as a share of revenue, and the difference between the average funding rate and nominal growth. When that last term is negative, the debt ratio falls on its own without new borrowing; when it is positive, it rises on its own.

The order to read this table in

First, align the basis: is Korea on D1 or D2, is Japan on gross or net? Comparing D1 with gross maximises the gap; comparing D2 with net narrows it. Second, look past the ratio to the currency's standing and the identity of the holders. Those two factors turn the same ratio into an entirely different risk.

Third, the lesson from Japan is not "high debt is fine" but "here are the conditions required to carry high debt." Fourth, check what share of the budget interest payments absorb in both countries. The pace at which interest costs squeeze the budget often becomes the binding constraint well before the stock of debt does.