Is Japan's economy going the Greece way?

Is Japan going the way of Greece?

Japan’s Prime Minister Shigeru Ishiba raised eyebrows with his remarks that his country’s fiscal situation was worse than that of Greece.

Greece has witnessed a decade-long financial crisis that saw it borrowing tens of billions of dollars from its European Union partners and the International Monetary Fund.

The country has recently witnessed its rice prices soaring – forcing it to tap into its emergency reserves.

But what happened? Is Japan on the same path as Greece?

Let’s take a closer look:

What happened?

Ishiba on Monday warned that Japan is facing a dire fiscal situation.

“It’s important to recognise the dangers of a society and a world with interest rates. The government is not in a position to comment on interest rates, but the reality is we are facing a world with them. Our country’s fiscal situation is undoubtedly extremely poor, worse than Greece’s,” Ishiba was quoted as saying by the Independent.

“Japan is seeing interest rates turn positive and its fiscal state is not good,” Ishiba told Parliament. “While tax revenues are rising, social welfare costs are also increasing.”

Ishiba also made his comments while rejecting calls for tax cuts from opposition parties ahead of a July election in Japan’s Upper House.

The remarks came amid news that Japan’s economy had shrunk for the first time in a year.

Japan’s real gross domestic product (GDP) shrunk by 0.7 per cent in January-March – far bigger than a median market forecast of a 0.2 per cent drop.

The decline was due to stagnant private consumption and falling exports, suggesting the economy was losing support from overseas demand.

The data did highlight some brighter aspects, which included GDP growth being revised up slightly to 2.4 per cent from 2.2 per cent for the final quarter of last year.

Capital expenditure rose a faster-than-expected 1.4 per cent, helping domestic demand add 0.7 percentage point to GDP growth.

Private consumption, which accounts for more than half of Japan’s economic output, was flat in the first quarter, compared with market forecasts for a 0.1 per cent gain.

The GDP deflator, which shows the extent to which firms are able to pass on rising costs, rose 3.3 per cent in January-March from year-before levels, accelerating for second straight quarters.

Overall, however, analysts were cautious about the softer demand impulse and risks to the outlook from a Trump-led change to the global trade order.

Is Japan on same path as Greece?

The signs are not good.

The Independent quoted data from the International Monetary Fund as showing that Japan’s government debt in 2025 is 234.9 per cent of its GDP.

That number for Greece was 142.2 per cent.

Worse,  the decline came even before Trump’s announcement on April 2 of sweeping “reciprocal” tariffs.

Japan is currently trying to negotiate a trade deal with the United States – which has placed a 24 per cent tariff on all its goods.

Washington has also added a 25 per cent levy on cars from Kyoto.

The tariffs are set to go into effect in July unless a deal is reached.

Japanese policymakers and ruling party lawmakers have said they see no merit in striking a deal with the US unless the tariff on automobile imports is lifted , given the industry’s economic importance.

“Slapping tariffs on Japan is less painful for the U.S. than doing so on China. As such, the U.S. doesn’t have a huge incentive to compromise and seek an early agreement with Japan,” Takahide Kiuchi, executive economist at Nomura Research Institute, said.

Kiuchi predicted that bilateral talks will likely drag on.

Japan’s upper house election also gives Ishiba little room for compromise in politically sensitive areas like agriculture. Ruling party heavyweight Hiroshi Moriyama, who is a close aide of Ishiba, has ruled out boosting imports of US rice.

Key differences with Greece

However, as Fortune pointed out – one major difference between Japan and Greece is that every eight out of 10 euros of debt was with foreign bondholders.

Japan, on the other hand, has most of its debt with its citizens.

Japan also has another card to play against the US – as of March, it owned $1.13 trillion in US treasuries.

According to Fortune, this makes Japan the largest foreign investor in the US.

Ironically, it was the US this week that lost its perfect AAA rating from Moody’s.

The development came months after Donald Trump was sworn in for his second term. The US, has been witnessing financial and economic uncertainty over Trump’s trade policies, is attempting to pass another tax cut for its richest.

The ratings agency blamed the US’ skyrocketing debt – which sits at $36 trillion and could increase by another $3 trillion to $5 trillion if the tax cuts are passed.

The US no longer has a top credit score from any agency.

As per The Independent, Japan is also a major bondholder of other nations.

Still, some experts are more worried about a recession in Japan – which his facing an aging population and rising healthcare and welfare costs.

“Uncertainty is greatly heightened by the Trump tariffs, and it is likely that the economic slowdown trend will become clearer from (the sec`ond quarter) onward,” BNP Paribas chief economist Ryutaro Kono said.

Japan’s economy “lacks a driver of growth given weakness in exports and consumption. It’s very vulnerable to shocks such as one from Trump tariffs,” Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, added.

“The data may lead to growing calls for bigger fiscal spending,” he said, adding that “the possibility of the economy entering a recession cannot be ruled out, depending on the degree of downward pressure caused by the tariff issue.”

With inputs from agencies