Japan breaks its all-time record for public debt as it accelerates spending expansion

TokyoJapan ended 2025 with a record high in public debt, reaching 1.34217 trillion yen (approximately €8.6 trillion), according to data released this week by the Ministry of Finance. This figure, which is more than double the country's gross domestic product (GDP) of approximately 660 trillion yen (€4.2 trillion), comes at a crucial time, with the newly elected government pursuing a clearly expansionary fiscal policy while the Bank of Japan begins a gradual normalization of interest rates. The debt volume increased by 24.5 trillion yen (approximately €157 billion) compared to the previous year, driven primarily by increased spending on social security, defense, and debt servicing, amid rising sovereign debt yields. Of the total accumulated, 1.197 trillion yen (7.7 trillion euros) corresponds to government bonds, in addition to 44 trillion yen in loans (239 billion euros) and 100 trillion yen in financing bonds (541 billion euros in exchange for financing).

The problem is not only the magnitude of the debt, but also the political and monetary moment in which this record is reached. The government of the recently elected Prime Minister, Sanae Takaichi, has opted to deepen an expansionary spending strategy—especially in defense, energy subsidies, and support for families and businesses—just as the Bank of Japan has begun to abandon, tentatively but significantly, the era of ultra-low interest rates. This lack of coordination between fiscal and monetary policy creates unprecedented tension in an economy accustomed to financing itself at virtually no cost. For decades, Japan has been able to sustain an extraordinary level of debt thanks to a central bank willing to massively purchase strong sovereign bonds and keep interest rates near zero. But that balance is no longer guaranteed. With inflation firmly above target and the Bank of Japan under pressure to normalize its policy, every percentage point increase in interest rates directly raises the government's borrowing costs. The political leeway to continue spending without limits is shrinking, and the government is avoiding an uncomfortable debate: how far can it stretch the debt without compromising future sustainability?

Global Impact

This shift is not merely a domestic issue. Japan is the world's largest creditor and a key player in global financial markets. Any change in its monetary policy has immediate effects on the yen, capital flows, and the well-known carry tradeThis is an operation in which international investors borrow in cheap yen to invest in more profitable assets abroad. If Japanese interest rates continue to rise, this mechanism could abruptly unravel, generating turbulence in emerging markets and Western financial centers. This scenario contrasts sharply with the apparent strength of Japanese financial markets. The Tokyo Stock Exchange, with the Nikkei 225 firmly above 57,000 points, has reached record highs, driven by the weak yen, high profits for large exporting corporations, and the inflow of foreign capital. This stock market euphoria provides the government with a comfortable narrative of economic success, but it masks a less visible reality: the increase in asset values ​​does not correct fiscal imbalances; instead, it may further postpone an uncomfortable political debate on debt, taxes, and fiscal sustainability.

Unlike other crises, the Japanese risk does not stem from an imminent collapse, but from an accumulation of postponed decisions. The country continues to be perceived as a safe debtor, but that confidence is based on the idea that the Bank of Japan will always act as the ultimate guarantor. If that premise breaks down, Japan could paradoxically become a source of global instability. The record debt is not just a historical fact: it is a warning about the limits of a model that has functioned for too long without being politically challenged.

Political Interference

The record debt comes amid a deliberate impoverishment of political debate: Takaichi's government presents the expansion of spending as an almost natural necessity—national security, social protection, competitiveness—but avoids explaining how it intends to finance it in a scenario of monetary normalization. The issue of debt has disappeared from the center of public discourse, replaced by a rhetoric of economic strength that implicitly relies on the Bank of Japan to continue absorbing the cost of political decisions. This strategy shifts the risk from the democratic to the technocratic arena. The executive spends; the central bank manages the consequences. But this separation is increasingly unsustainable: pressuring the Bank of Japan to maintain an accommodative policy while public spending expands limits de facto Its independence is undermined, turning monetary policy into a silent extension of the fiscal program. This is not merely an economic issue, but an erosion of the principle of political accountability.

The underlying problem is not so much the volume of the debt as the lack of political will to bear its cost, since neither the government nor any party in the weakened opposition proposes structural fiscal reforms or an honest debate on taxes, aging, and fiscal sustainability. The debt is normalized as something technical and inevitable, while future generations are saddled with a bill that has not undergone any real democratic deliberation. More than an imminent crisis, Japan faces a crisis of economic governance.

Japanese debt is no longer just the legacy of years of stimulus, but the result of a conscious and repeated political decision over the years. The Takaichi government relies on the Bank of Japan to continue acting as a permanent buffer, neutralizing any signs of risk and indefinitely postponing decisions that would have electoral repercussions. This tacit agreement allows for short-term stability but empties the fiscal debate of real content and shifts responsibility out of the political arena. The more debt without clear limits or an honest narrative becomes normalized, the more the capacity for democratic control over one of the central variables of the country's economy is eroded.