The $40 trillion U.S. national debt is smaller than Japan’s relative to its economy—but economist warns America is still ‘the world’s largest debtor’

Despite its staggering $40 trillion national debt, the United States barely ranks in the top 10 countries in terms of debt relative to the size of its economy. While this might seem like a positive, economists caution that the U.S. still faces significant concerns. The U.S. holds the title for the largest national debt worldwide, surpassing China's $18.7 trillion debt by over double. However, when comparing the debt-to-GDP ratio, America's 126% is still considerably less than Japan's 207% and Singapore's 172%.

The idea of a "dangerous" debt-to-GDP ratio remains unclear, but Japan's ratio of 207% indicates that their national debt is twice the size of their economy. If a nation devoted all its economic gains towards paying off its debt, it would take Japan two years to fully eliminate it. The U.S., however, has a debt-to-GDP ratio of 122%, meaning it already owes more than its entire economy.

Apollo chief economist Torsten Slok warns that the U.S.'s daily debt accumulation of about $7 billion is weakening the nation's ability to respond to recessions. This is because the U.S. cannot easily inject stimulus into the economy, such as tax cuts or infrastructure spending, without further increasing its debt. Similarly, the Federal Reserve cannot lower interest rates to encourage borrowing without risking inflation and disrupting bond demand. Slok argues that the U.S. has never entered a recession with such a depleted fiscal buffer.

Despite Japan's relatively lower debt-to-GDP ratio, economists are less concerned about its debt levels compared to the U.S. This discrepancy stems from the unique structure of Japan's debt. Around 90% of Japan's government debt is held domestically by local banks and insurance funds, limiting potential foreign investors during economic crises. Additionally, Japan has a household savings rate equivalent to one-third of its GDP—double that of the U.S.—which further reduces reliance on overseas bondholders.

Research fellow Jack Salmon from the Mercatus Center at George Mason University explains that Japan's debt dynamics differ significantly from the U.S.'s. Japan is the world's largest creditor nation, while the U.S. remains the world's largest debtor. However, this does not mean Japan's situation is ideal, as its yen is depreciating due to various global factors.

This depreciation, combined with long-term bond yield increases, means Japan must raise interest rates to combat inflation, which would increase the cost of servicing its debt. Prime Minister Sanae Takaichi plans to boost deficit spending to stimulate economic growth, but doing so risks sparking further inflation. Salmon emphasizes that Japan's situation serves as a cautionary tale rather than a comforting counterexample to U.S. debt concerns.