Chart of the Week: Japan and Canada's Debt

It's no surprise Japan has a major debt problem. Japan currently has the highest debt-to-GDP ratio in the world, and far surpasses its G7 counterparts. But perhaps it is more striking that Canada followed such a similar trajectory until the mid 1990s. 

Why is Japan's debt-to-GDP ratio so high? 

There are two (obvious) parts to this problem. Japan has an obscene amount of debt, which has continued to grow over the past two decades as it has experienced financial crises and demographic changes. Interest rates have reached historic lows, which have created a degree of stability in the Japan's debt. In tandem, Japan's productivity has been unimpressive, thereby stagnating the country's GDP growth. 

What did Canada do differently? 

In the early 1990s, Canada's debt was so high commentators mocked it as being an 'honorary member of the third world'. Canada, unlike Japan, was able to make large fiscal reforms to cut spending. Given Japan's ageing population, large social security payments and healthcare expenditure have added additional pressures on government spending. Canada also benefitted from falling average interest rates between the 1990s and mid-2000s.