National Debt of Japan

Governments issue bonds in order to raise money for various projects. Bonds are simply an IOU, that is, a debt instrument. But what happens when a government takes on too much debt? Although governments unlike institution or individuals don't exactly come under the same rules of bankruptcy but if they surpass their debt capacity and their cash flows (taxes) aren't sufficient to pay the interest on their debt they can go bankrupt. Let's take Japan into consideration.

In 1947, during the post-war Shōwa period, Japan adopted a new constitution emphasizing liberal democratic practices.The period of overall real economic growth from the 1960s to the 1980s has been called the Japanese post-war economic miracle: it averaged 7.5 percent in the 1960s and 1970s, and 3.2 percent in the 1980s and early 1990s. During this period the Japanese government borrowed heavily in order to fuel its economy. All was going well till 1990 when the Japanese asset price bubble collapsed. This led to very slow economic growth in the 1990s, the economic growth was so slow that they even called it "The Lost Decade" and caused the country to run under massive budget deficits.

By 1998, Japan's public works projects still could not stimulate demand enough to end the economy's stagnation. In desperation, the Japanese government undertook "structural reform" policies intended to wring speculative excesses from the stock and real estate markets. Unfortunately, these policies led Japan into deflation on numerous occasions between 1999 and 2004. The Bank of Japan even printed new money to expand the country's money supply in order to raise expectations of inflation and spur economic growth, but this only led to deflation.

The government also tried to reduce the interest rates to a near zero hoping that lower interest rates would mean people will pay less interest on loans hence having more money to spend, which in turn would increase demand thus boosting the economy. This did not help as Japan is an aging country, that is, most of its citizens are too old to work and will focus on saving rather than spending. As the country has fewer young people, it also lacks the workforce it once had and growth opportunities for the Japanese youth are few as the corporate ladders are already crowded.

On 5 April 2013, the Bank of Japan announced that it would be purchasing 60–70 trillion yen in bonds and securities in an attempt to eliminate deflation by doubling the money supply in Japan over the course of two years. Markets around the world have responded positively to the government's current proactive policies, with the Nikkei 225 adding more than 42% since November 2012. The Bank of Japan also introduced negative bank rates in January 2016 in order to try and reinvigorate the deflating economy.

Whether or not these steps will help the Japanese economy to return to its older more glorious days is yet to be seen, but one thing is for sure the corona virus pandemic, that plagues the world and has caused a state of emergency in Japan, will cause a massive setback to the government's efforts. So much so that some economists say that the pandemic might have given the final blow to the economy which had finally achieved slow growth in 2018.