Japan’s Debt, Now Twice the Size of Its Economy, Forces Hard Choices

Japan’s government faces pressure to curtail debt-fueled spending that some argue has staved off populist waves.

Debt-fueled public spending, enabled by low interest rates, has long been a way to address the country’s problems. Struggling farmers and emptying countrysides received generous payments from the central government. Relief aid during the Covid-19 pandemic morphed into new outlays for defense and subsidies to help consumers weather inflation.

The spending continued even as more social security funding was needed for Japan’s growing number of seniors. Government debt has ballooned to nearly $9 trillion — more than double the size of the economy.

Now, ahead of a heavily contested summer election, Japan’s ruling party is facing pressure to add even more debt. Small businesses hurting from U.S. tariffs are calling for government aid, and households squeezed by rising prices are demanding a rollback in taxes.

But as the Bank of Japan moves away from the negative interest rates that for years made it easy for the government to borrow, the limits on spending are more stark.

Most economists and officials agree that Japan is not headed for an imminent financial meltdown. A large majority of Japanese debt is held by the Bank of Japan and domestic financial institutions, meaning there is a low risk that money will suddenly be pulled out of the country. But doubts are increasing about how long the country can keep up its current spending path.

An election in Japan’s upper house in July stands to test Mr. Ishiba’s Liberal Democratic Party, which has kept a virtual lock on power in Japan for the past seven decades. The party’s grip in more recent years, some analysts say, can be attributed in part to its ability to use spending to tamp down some of the populist opposition seen in other advanced democracies.

In contrast to some parts of Europe and North America, where populists tend to win with rural supporters, Japan’s brand of populism is more of an urban phenomenon, particularly some white-collar and a swath of nonregular workers, who revolt against portfolio spending when they’re the ones generating tax surpluses.

Over the past year, protesters have massed in front of the Finance Ministry’s building in central Tokyo. The demonstrations, at times drawing around 1,000 people, are notable in a country mostly unaccustomed to large-scale displays of public dissatisfaction. Their placards demand the removal of national consumption taxes and the dismantling of the Finance Ministry, an institution long seen as the force within Japan trying to enact spending discipline.

Ahead of the election, several opposition parties have come forward with plans for how to roll back taxes that were raised in 2019 to chip away at Japan’s deficits. Mr. Ishiba has declared himself opposed to a consumption tax cut. But within his party, he faces opposition from a faction of fiscal expansionists who argue that government deficits are largely inconsequential.

Economic uncertainty caused by U.S. tariffs also makes this an inopportune moment for Tokyo to push to significantly curtail government spending. However, looking further ahead, Japan will have to deliver on fiscal consolidation because potential economic growth remains subdued, costs for pensions and health care will continue to climb, and rising interest rates will render the financing of its debt increasingly burdensome.

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