Reflationary Dynamics and Japan's Debt-to-GDP Ratio

Fitch Ratings has highlighted a significant trend in Japan's economy, noting that reflationary dynamics are expected to continue reducing the government's debt-to-GDP ratio in the coming years.

Future Projections and Concerns

However, the agency projects a reversal later this decade, citing aging-related healthcare costs, increased spending on defense and childcare, and higher interest payments as potential strains on public finances.

Interest Rates and Inflation

Since 2022, bond yields have been on the rise as the Bank of Japan moves towards policy normalization. Despite this, the effective interest rate on debt remains below the inflation rate, a detail Fitch emphasized in its January 2025 affirmation of Japan's 'A'/Stable rating, with the debt trajectory flagged as a critical area for future assessment.