Lessons for G7 Economies from Japan’s Super High Public Debt-to-GDP Ratio

As a member of the G7 group of the world’s key economies, Japan’s economic fortunes have an impact on the wider global economy. It has by far the largest public debt-to-GDP ratio in the world, rising every year from 2009-2014, hitting 247% in 2014, and is forecast by the OECD to reach 400% by 2040 if it does not undertake more sweeping reforms. This is negatively impacting business and consumer confidence. Key contributing factors are a high old age dependency ratio and low female employment rate, which some other G7 members share, and must tackle if they are to circumvent a similar fate.

Japan

The root causes of Japan’s debt woe and ineffective measures to tackle it

  • Besides uncontrollable factors such as the need to spend public money repairing the Tsunami damage in 2011, the crux of Japan’s widening debt to GDP ratio hinges largely on its aging population. It had the highest mean age of its population globally in 2014, at 45.2 years versus the global average of 32.1 years. Its old age dependency ratio was also the highest in the world in 2014, at 42.4, the percentage of persons older than 65 per persons aged 15 – 64, compared with the world average of 13.0. The lack of working age population to fund pensions and social security payments for its vast elderly population has meant that Japan has slipped further into debt;
  • The OECD’s prediction for Japan’s debt levels is likely to become a reality if it does not do more to tackle the age imbalance. It has taken measures, such as a series of costly fiscal stimulus packages, to try to address its economic problems, but this has only served to plunge it further into debt.

Female employment rate rise could alleviate strain on public funds

  • One of the ways it could try to reduce its public debt could be by increasing its female employment rate. At 70.6% of the working age 15-64 female population in 2014, Japan already has the highest female employment rate among the G7. Yet in the context of the male employment rate of 92.3% in the same year, it is low. Although the government has had some degree of success in raising the female employment rate from 65.1% in 2009 through improvements to childcare facilities, there is evidence to suggest that there is a strong presence of a glass ceiling in Japanese workplace cultures, and women are often found in lower paid temporary employment compared with their male counterparts, diminishing their end contribution to public funds;
  • Another way is through reforms to its pension system to cut its sizeable social welfare bill of US$855 billion in 2014, accounting for 46.1% of its total government expenditure in the same year. It is set to raise the mandatory retirement age to 65 by 2025, but even this is far too low given that other countries with far more robust public finances, such as the UK, have scrapped the retirement age altogether.

Other G7 Economies at Risk

  • Other G7 economies with similarly high old age dependency ratios and rising public debt levels could be at risk of following Japan’s fate if they do not take measures to tackle the issue. Italy looks particularly at risk. With a debt-to-GDP ratio of 132% in 2014, an old age dependency ratio of 33.1 and very poor female employment rate of just 46.9% in 2014, its debt levels could rise to Japan’s levels in the long term if it does not actively tackle them. Germany’s debt-to-GDP ratio might be the lowest among the G7 in 2014 at 73.1%, but its old age dependency ratio is set to hit 45.5 by 2030, storing up problems for its public finances in future.