The COVID-19 pandemic has led to the expansion of debt in nations throughout the world. With inflation rising and monetary policies tightening in Europe and the United States, there are concerns that private companies and governments holding significant debt will face an increased burden of interest payments, while financial institutions and other bond-holders will increasingly be affected by a decline in the value of their holdings.

This paper will review and analyze the extent to which debt has expanded due to the COVID-19 pandemic from an international comparative perspective, and will also examine future policy issues. From an international perspective, in Japan and many Western industrialized nations, government debt has expanded rapidly due to the COVID-19 pandemic, and corporate debt has also tended to increase. Given this situation, it will be important for each nation affected, including Japan, to consider the impact of rising interest rates on the real economy and the global financial system during a future phase of monetary tightening in Europe and the United States.

In particular, we must bear in mind that Japan’s outstanding government debt is enormous even by international standards, and that rising interest rates may reduce the nation’s capacity for fiscal expenditure in the future. At the same time, while the non-manufacturing sector in particular has seen a marked increase in debt, it also possesses ample cash resources and deposits with financial institutions. In the case of companies that may become mired in excessive debt, there is an urgent need to create an environment that will facilitate corporate rehabilitation at an early stage*.

*Data analysis for this paper was conducted by Kozue Sekijima, a NIRA Research Coordinator and Research Fellow.

This is a translation of a paper originally published in Japanese in June 2022.