Japan, once hailed as a model of fiscal discipline and economic stability in the post-war era, is now facing one of its most troubling financial challenges in decades. The warning sounded by Prime Minister Shigeru Ishiba in May 2025 that Japan’s financial condition is “worse than Greece’s” has triggered concern both within the country and among international observers. With its debt-to-GDP ratio soaring to unprecedented levels, a weakening demographic base, rising welfare costs, and sluggish economic growth, the world’s third-largest economy finds itself at a critical point.
The roots of Japan’s current fiscal problems can be traced back to the asset price bubble burst of the early 1990s, which led to a prolonged economic stagnation often referred to as the “Lost Decade.” In response, successive Japanese governments adopted aggressive stimulus measures, including public works spending and ultra-loose monetary policy, in a bid to revive economic activity.
Over time, these measures contributed to a steady increase in public debt. However, instead of reversing course, the governments continued to borrow, with the debt pile compounding year after year. This borrowing was largely enabled by Japan’s unique position — its debt was held mostly by domestic investors, including Japanese banks and institutions, which gave it more room to manoeuvre than countries reliant on foreign borrowing.
This domestic cushion helped Japan delay the kinds of financial collapses seen in countries like Greece during the eurozone crisis. However, the current situation has made clear that such a cushion cannot shield a country forever. Prime Minister Ishiba’s comparison with Greece is not simply rhetorical.
JUST IN: Japan’s Prime Minister says his country’s financial situation is worse than that of Greece
— The Spectator Index (@spectatorindex) May 19, 2025
According to the International Monetary Fund, Japan’s general government debt stood at 234.9 per cent of GDP in early 2025. In comparison, Greece’s debt stood at around 142.2 per cent. Though Japan has not yet experienced a default or the kind of bailout that defined the Greek crisis, the numbers speak for themselves. Debt service costs are rising, investor confidence is not infinite, and the country is running out of options.
The immediate concern now is the rising interest rate environment. For many years, Japan maintained ultra-low or even negative interest rates as part of the Bank of Japan’s monetary easing policy. That era is now ending. In 2024, the Bank of Japan raised short-term interest rates to 0.5 per cent and began reducing its purchases of government bonds. This change in policy marked a sharp departure from more than a decade of aggressive monetary stimulus. The central bank’s decision came amid inflationary pressures and rising global rates, especially after the U.S. Federal Reserve and other major central banks tightened policy in response to inflation.
With higher interest rates, the cost of borrowing increases, which directly impacts the government’s ability to service its massive debt. Japan’s 10-year government bond yield recently reached 1.48 per cent, while the 30-year bond yield stood at 2.87 per cent. These may not seem high by international standards, but for a country carrying such a large debt load, even a small rise in rates can translate into enormous increases in debt servicing costs.
Finance Minister Katsunobu Kato has warned that while Japan is not facing immediate difficulty raising funds, continued market trust is essential. Any erosion of that trust could trigger a spike in yields, a weakening of the yen, and inflationary pressure—all of which could strain the economy further.
What is happening in Japan?
Japan’s 40-year bond yield just hit its highest level in over 20 years.
Japan’s Prime Minister Ishiba has called the situation “worse than Greece.”
All as Japan’s GDP is contracting again. pic.twitter.com/L7rapCyUof
— The Kobeissi Letter (@KobeissiLetter) May 19, 2025
Another factor worsening Japan’s financial situation is its demographic crisis. Japan has one of the oldest populations in the world, with a shrinking workforce and a rising number of retirees. As a result, social welfare costs have been climbing steadily, putting more pressure on the public purse.
While tax revenues have increased somewhat in recent years, they are far from sufficient to cover the growing costs of healthcare, pensions, and other welfare-related expenditures. The population decline also dampens economic growth, reduces consumption, and limits the ability of the state to collect taxes.
The country’s GDP figures have not helped matters either. In the March quarter of 2025, Japan’s GDP contracted by 0.7 per cent, far worse than the market forecast of a 0.2 per cent decline. The contraction was driven by weak consumer spending and falling exports. Japan’s economy, heavily dependent on trade, has also been affected by global trade disruptions.
In particular, U.S. President Donald Trump’s new tariffs have had a direct impact on Japanese exports, including automobiles, steel, and aluminium. Starting July 2025, Japan faces the possibility of a 24 per cent import tariff unless a deal is struck with the U.S., adding further uncertainty to its export-reliant industries.
JUST IN: Japan’s Prime Minister says his country’s financial situation is worse than that of Greece
Top reasons why:
📉 Debt-to-GDP is over 260% — the highest in the developed world
👴 Aging population is driving up pension and healthcare costs
👶 Shrinking birth rate means…— Jacob King (@JacobKinge) May 19, 2025
The political climate is also adding pressure to the economic crisis. Prime Minister Ishiba is under increasing pressure from opposition parties and some factions within his own coalition to announce tax cuts to stimulate growth. There have been calls to reduce the consumption tax in particular.
However, Ishiba has firmly rejected the idea of funding tax cuts through additional borrowing, stating that Japan can no longer afford to rely on debt to stimulate the economy. “We can’t continue down this path of unlimited borrowing,” he said during a session in parliament. This statement reflects a growing recognition that Japan has reached the end of its ability to use debt-funded stimulus without serious consequences.
The crisis is not new, and there have been warnings before. In 2010, then-Prime Minister Naoto Kan warned that Japan’s financial condition could become worse than Greece’s if no action was taken. At that time, Japan’s debt had already surpassed 200 per cent of GDP. Fifteen years later, the warnings have become reality. Despite the efforts of various governments to reform pensions, healthcare, and taxation, there has been little political consensus or public appetite for the kind of deep structural changes that may now be unavoidable.
A key concern going forward is whether Japan can maintain investor confidence. As long as domestic institutions continue to purchase government bonds and the yen remains relatively stable, the country may avoid an immediate financial breakdown. But this window of opportunity may be closing. The Bank of Japan is stepping back from being the largest buyer of government bonds, which means market forces will play a bigger role in determining interest rates. Any sign of hesitation from investors could lead to a rapid increase in yields, causing a ripple effect across the financial system.
Japan’s Prime Minister just said his country’s financial situation is worse than Greece.
And scene… 🎬 https://t.co/nU3Riu96Rb
— Gold Telegraph ⚡ (@GoldTelegraph_) May 19, 2025
There is also a growing risk of inflation. Although Japan has struggled with deflationary pressures for decades, a sudden weakening of the yen combined with higher interest costs and rising import prices could trigger inflation, eroding purchasing power and placing further stress on households. The irony is that after years of trying to generate inflation to stimulate the economy, Japan may now face the opposite problem—rising prices driven not by demand, but by structural weaknesses and external pressures.
Looking ahead, Japan faces a difficult set of choices. Structural reforms to address long-term pension obligations, streamline healthcare spending, and boost workforce participation—especially among women and the elderly—are necessary. Immigration policy, long a sensitive issue in Japan, may also need to be revisited to address labour shortages. Without such reforms, it will be hard to break out of the cycle of slow growth, high debt, and increasing welfare costs.
