What Does “Fiscal Collapse” in Japan Really Mean? —A Simple Economic Guide to Moving Beyond Mental Paralysis—

What Does “Fiscal Collapse” in Japan Really Mean? —A Simple Economic Guide to Moving Beyond Mental Paralysis—

“Japan’s debt exceeds 1,200 trillion yen, which is 10 million yen per citizen. This country is headed for collapse…”

You’ve probably heard statements like this at least once. Repeated on television, in newspapers, and online, these words cast a vague sense of dread over our future.

But let’s pause and think for a moment. What does this “collapse” actually mean?

In this article, I want to help us break free from the spell of the ambiguous term “fiscal collapse” and unfold a conceptual map to calmly re-examine the Japanese economy.

1. Why is the “Collapse” Debate Always So Confused?

For over 30 years in Japan, two opposing arguments about public finance have clashed.

Argument A: “If we keep printing government bonds, Japan will become unable to pay its debts and suffer a ‘fiscal collapse’!”
Argument B: “Japan’s government bonds are denominated in yen and held domestically, so a ‘fiscal collapse’ won’t happen!”

Argument B is often met with a counterargument: “No, printing too many bonds will cause the yen’s value to plummet, leading to a collapse through ‘hyperinflation’!”

It feels as if, no matter which path we take, a cliff called “collapse” awaits. However, this debate is fruitless because the “collapse” in Argument A and the “collapse” feared in Argument B are two completely different things.

Many people tend to think, “If it leads to economic chaos either way, it’s all the same,” and fall into a state of mental paralysis. But just as misdiagnosing a disease leads to the wrong treatment, confusing these two scenarios will lead a nation to completely misjudge its economic policy.

2. The True Nature of “Collapse”: Two Entirely Different Scenarios

The “collapse” discussed in the Japanese context can be broken down into the following two main scenarios. Simply distinguishing between these terms can bring immense clarity.

Scenario ①: Sovereign Default

What it means: A situation where a country can no longer make its promised interest payments or principal repayments on its government bonds.
A familiar image: This is similar to corporate or personal “bankruptcy.” The straightforward idea of “being unable to pay back debts” is what most people imagine.
The likelihood for Japan: Extremely low. This is because the Japanese government, through the Bank of Japan, can issue the “yen” it needs for repayment. Its situation is fundamentally different from countries that struggle with debt denominated in foreign currencies like the US dollar.

Scenario ②: Hyperinflation

What it means: A situation where the value of a currency plummets, and extreme price increases spiral out of control.
A familiar image: Think of post-WWI Germany or modern Zimbabwe, where money becomes nearly worthless paper.
The likelihood for Japan: This remains a theoretical risk. If Japan continues to issue money far beyond its productive capacity (its ability to supply goods and services), it is not impossible that faith in the yen could be lost, triggering severe inflation.

In short, Japan’s primary risk is not a default (being unable to pay back money), but inflation (the money itself losing too much of its value).

3. Different Causes, Different Prescriptions

Why is this distinction so important? Because if the “disease” you fear is different, the “prescription” will be completely different as well.

If you fear DEFAULT:
- The prescription is austerity: “Cut spending,” “raise taxes.” The focus is singular: “We must reduce the debt!”
If you fear INFLATION:
- The prescription is nuanced economic management: “Increase the nation’s supply capacity,” “adjust interest rates.” The problem isn’t the “amount of debt” itself, but the “balance between the money supply and the economy’s productive capacity.”

For the past 30 years, Japan has been suffering from deflation, a kind of “economic hypothermia.” Yet, out of fear of default, it has been consistently treated with austerity, which is like an “economic fever reducer.” It’s no wonder the economy has lost its vitality.

4. A Change in Perspective: From a Household Ledger to a Corporate Balance Sheet

When we hear the phrase “national debt,” we instinctively think of our own household budget. However, a nation’s finances are more akin to a “corporate balance sheet,” which considers both assets and liabilities.

As economist Yoichi Takahashi has pointed out, when you view the Government of Japan and the Bank of Japan as a single consolidated entity, the picture changes dramatically.

Bonds held by the Bank of Japan: The massive amount of government bonds held by the BOJ is a liability for the government, but on a consolidated balance sheet, it’s like an internal loan within the same corporate group and is effectively canceled out.
The Government’s vast assets: The Japanese government possesses enormous assets, including the world’s largest net foreign assets.

To cry “collapse” by looking only at the debt is like looking at a wealthy corporation’s liabilities without considering its vast assets and declaring it’s in danger. From this perspective, Japan’s fiscal health is actually among the soundest in the developed world.

5. Conclusion: Escaping Mental Paralysis and Restoring Balance

There is an old Chinese fable, “The Man from Qi Who Feared the Sky Might Fall” (Kiyū), about worrying needlessly over an impossible event. Another, “Guarding a Tree Stump to Wait for a Rabbit” (Shu shu tai to), warns against foolishly clinging to an old method, hoping for a stroke of luck to repeat itself.

Isn’t Japan’s “fiscal collapse” debate a victim of both? We needlessly worry about an improbable default (Kiyū) while clinging to the old formula of austerity that may have once worked (Shu shu tai to). Could the result of this be our “Lost 30 Years” of economic stagnation?

Neither type of “collapse” is an immediate catastrophe waiting to happen. What’s crucial is balance. Having pursued austerity for over 30 years, it is time to discuss a flexible policy shift toward fiscal and monetary easing that promotes economic growth.

After all, the reason ancient scriptures restricted interest was because they knew that unchecked financial activity creates inequality and division, ultimately destroying the community. Modern Japan is now facing these very problems of widening disparity and poverty.

Perhaps the time has come to stop being paralyzed by the thought-terminating word “collapse” and to begin a calm, constructive debate about the kind of society we truly want to build.