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Evolution of Government Debt and Its Sustainability in Japan and Germany: Two Contrasting Cases
We examine the contrasting evolution of government debt-GDP ratio for Germany and Japan. While Germany contained the growth of its debt-GDP ratio close to its sustainability level over a long period, Japan has slipped away towards non-sustainability. This is due to the behaviour of primary balance to GDP ratio. The estimated debt sustainability thresholds are 62.0% for Germany and 176.0% of GDP for Japan. In the post Covid years, Germany would converge back to its debt sustainability level almost automatically whereas Japan will have to make a strong conscious policy effort to reduce its primary deficit relative to GDP.