U.S. Has a Lower Debt Ratio Than Japan, But Analysts Warn It Faces Greater Rate Risk

At the roughly $7 billion a day that Apollo chief economist Torsten Slok cites ^[8], the US adds about $2.6 trillion of debt a year ^[2]. That is close to 6.4% of the existing $40 trillion stock ^[3], and every one of those dollars needs a buyer at a yield the buyer will accept. Japan's ratio runs 81 points higher than America's ^[6]. Only about a tenth of Japanese government debt sits outside domestic banks and insurance funds ^[4]. According to Fortune, that leaves few foreign investors in a position to dump those bonds in a global panic ^[6].

Jack Salmon, a research fellow at the Mercatus Center at George Mason University, put the contrast in balance-sheet terms. "Japan is the world's largest creditor nation. The U.S. is the world's largest debtor," he wrote in a February Substack post ^[12].

Japan's own market complicates the comparison. The yen is weakening and long-term bond yields are rising ^[13]. Raising rates to fight the inflation that follows also raises what Japan pays to service its debt ^[13], and Prime Minister Sanae Takaichi still intends to increase deficit spending ^[14]. "The fact that even Japan is now testing the limits of debt tolerance should finally end the fantasy that advanced economies can borrow without consequence forever," Salmon said ^[15].

Stanford economist Jonathan Berk objects to the measure itself. He likened debt-to-GDP to dividing a mortgage balance by one year's rental income, a ratio that ignores maintenance and insurance and does not show whether the borrower can afford the loan ^[16]. "I don't think it is necessarily the doomsday scenario that people paint," he said ^[17].

I think the rate risk still sits more heavily with the US. A $2.6 trillion annual flow ^[2] has to be sold every year, and Japan's larger ratio is financed mostly from home ^[4]. Fortune's article does not give the share of Treasuries held abroad. The foreign-creditor half of the case therefore rests on the Japan contrast and on Salmon's label. Slok's concern is the next recession. "The U.S. has never entered a recession with this little fiscal buffer," he wrote in May ^[10]. He added that the usual sequence of Fed cuts and falling rates "breaks down when the sovereign borrower is already stretched" ^[11].

The view is wrong if the US finances that pace through a downturn without its yields rising ^[2]. It is also wrong if Japan's borrowing costs climb faster than America's despite a bondholder base that is about 90% domestic ^[6][13].