Japan Faces Mounting Debt Crisis in the Next Decade

A draft government estimate seen by Reuters on Friday revealed that Japan is facing an increase of over double in annual interest payments on government debt, reaching 24.8 trillion yen ($169 billion) over the next decade.

The final estimation, prepared by the Ministry of Finance for Parliament prior to discussing government budget bills, served as a reminder that the costs of debt financing can significantly rise with the central bank’s inclination to withdraw stimuli in crisis situations.

Years of unorthodox policies pursued by the Bank of Japan, such as negative interest rates, have kept borrowing costs extremely low, resulting in the efficient financing of government debt.

However, interest payments on government debt are expected to jump to 24.8 trillion yen in the fiscal year 2033, ending in March 2034, compared to 9.83 trillion yen for the fiscal year ending in March 2025, according to the estimation draft.

The public debt in Japan exceeds twice the size of its economy, making it the worst among industrialized countries. The latest estimate shows that the government will be burdened with record levels of unpaid debts, reaching 1.244.68 trillion yen by the end of March 2034. As a first step towards repairing the torn public finances, the government has pledged to bring the combined primary budget of national and local governments to a surplus by the end of the fiscal year in March 2026, a goal analysts describe as highly unlikely.

The initial budget balance, which excludes new bond sales and debt service costs, serves as a key measure of the extent to which political measures can be funded without issuing debt.

In a separate context, Mizuho Financial Group, the third-largest bank in Japan in terms of assets, announced on Friday an 8.2 percent increase in quarterly net profit, thanks to strong demand for loans from companies and a decrease in provisions for loan losses domestically.

“Mizuho joined its larger local competitor, Sumitomo Mitsui Financial Group, in announcing strong profits for the third quarter of the fiscal year ending in December, bolstered by strong lending activities as Japanese companies began investing in growth opportunities.”

The increasing expectations of interest rate cuts by the Federal Reserve helped boost Mizuho’s profits from fixed income trading. The bank achieved profits of 226.57 billion yen ($1.54 billion) from October to December, compared to 209.31 billion yen the previous year.

The total for the nine months reaches 642 billion yen, surpassing the profit expectations of 640 billion yen for the entire fiscal year ending in March. However, Mizuho Corporation has kept its annual expectations, pointing to the uncertainty in the business environment.

On Monday, Mitsubishi UFJ Financial Group, the largest bank in Japan, will announce its quarterly results.

The exposure of Japanese banks on the US commercial real estate market is being scrutinized, following the announcement by medium-sized lender “Ozora” of its first annual net loss in 15 years due to provisions for massive loan losses. However, analysts say that the problems at “Ozora” are mostly exceptional. “Mizuho” Bank said that the possibility of making additional provisions for losses on loans related to US commercial real estate is very slim.

On the other hand, the Japanese airline, “Japan Airlines,” announced on Friday an increase in its net profits for the nine months ending in December of last year by five times compared to the same period the previous year, reaching 85.87 billion yen ($587 million), driven by an increase in demand in the post-COVID-19 period.

The company reported a 24.2% increase in sales to 1.25 trillion yen during the nine months, with international travel sales increasing by 64.3%, driven by a 25.9% growth in domestic flight operations, according to the Japanese news agency “Kyodo”.

The increase in profits reflects a strong recovery in demand for air travel, which was impacted by the restrictions imposed to combat the pandemic. The company has maintained its expectations for full-year profits until the end of March. However, Japan Airlines plans to book operating expenses of approximately 15 billion yen due to the loss of one of its aircraft in a collision with another belonging to the Japanese Coast Guard at Haneda Airport in Tokyo last month.