Japan's central government debt and general government debt are not the same number

Japan's headline figure is central government debt

The Japan ticker on WorldRealDebt takes as its headline the central government debt that the Ministry of Finance releases each month. That measure covers government bonds, financing bills, and borrowings. Its appeal is that it is an official series, citable and refreshed often.

Its coverage, though, differs from the general government debt that turns up in international tables. General government takes in a wider slice of the public sector, the social security funds included. Line the figure on Japan's page straight up against IMF or OECD rankings, then, and you invite a reading error.

Why Japan can look different even with a high ratio

Japan's debt-to-GDP ratio is very high, yet many argue that the ownership of its bonds and its monetary setup soften the risk. A large share of the bonds is held by domestic investors, the Bank of Japan, and financial institutions, and the fact that the debt is denominated in yen lowers the kind of risk that touches off a currency crisis.

Low currency risk, however, does not amount to low fiscal risk. Once an ageing population, social security spending, years of sluggish growth, and the normalisation of interest rates pile up at once, interest costs and the burden of rolling debt over can grow heavier as time passes.

The strengths and limits of a central government measure

Central government debt is updated quickly and ties straight into domestic policy debate, which makes it a fitting yardstick for a real-time ticker. Check the Ministry of Finance reporting date and the interpolation formula, and you can see exactly how the current estimate was put together.

Its limit is that it cannot show, at a single glance, the burden carried by the whole public sector. That is why Japan's page keeps coming back, in its FAQ and on its sources page, to the gap with general government debt. Accuracy of definition counts for more here than a crisp-looking number.

The picture changes on a net basis

Gross general government debt stands at 262% of GDP, but net of the financial assets the government holds, the figure falls to 155%. More than a hundred percentage points turn on a single accounting choice. Which one you cite makes Japan's position look very different.

The assets netted out are mainly public pension reserves, foreign exchange holdings and stakes in government-affiliated financial institutions. They are real, but they are not free cash available for disposal. Pension reserves have future benefit payments as their matching liability, and reserves have exchange rate defence as their assigned purpose.

It is therefore safer to treat gross as overstating the burden and net as understating it. The substance lies somewhere between the two, but there is no accepted method for pinning down that point.

In practice, the only firm principle is to use the same basis as whatever you are comparing against. Compare gross with gross and net with net, and treat any table that mixes the two bases as difficult to trust on its face.

Who actually holds the bonds

More than 85% of Japanese government bonds are held domestically. A large share sits directly with the Bank of Japan, and the rest is divided among domestic banks, insurers and pension funds. The foreign-held share is low compared with other major economies.

The difference this structure makes shows up in a crisis. Foreign investors can trim holdings for domestic reasons of their own or on geopolitical judgement, while domestic institutions often must keep holding government bonds because of regulatory requirements and asset allocation. The character of selling pressure is simply different.

Central bank holdings are another layer again. The interest the Bank of Japan receives ultimately flows back to the treasury, and maturing holdings are largely repurchased. Viewed on a consolidated basis, it is defensible to read that portion as not a net burden on the government.

The structure has its price, though. A central bank holding a large stock of government bonds incurs valuation losses as rates normalise, and its monetary policy decisions become entangled with the fiscal position. That is why the conditions under which 262% has been sustained have to be read together with the cost of those conditions.

Principles for making comparisons

Korea's D1 and Japan's central government debt both sit close to a narrow measure of government debt, yet they are not quite the same construct. Neither lines up with America's total public debt, nor with Spain's EDP debt. A comparison page has to spell that difference out.

When you cite a Japanese debt figure, you have to state whether it is "central government debt" or "general government debt." Drop that one line, and conflicting ratios for one and the same country start to look as if they contradict each other.

So a Japanese figure should be read for its coverage, its holders, its currency, and its maturity structure rather than for its size alone. Miss those four, and you lose both the warning that a high debt ratio sends and the cushioning that is peculiar to Japan.