diff --git a/py/lexer.c b/py/lexer.c
index f736ef303..e2dfea78c 100644
--- a/py/lexer.c
+++ b/py/lexer.c
@@ -64,6 +64,13 @@ struct _mp_lexer_t {
     mp_token_t tok_cur;
 };
 
+// debug flag for __debug__ constant
+STATIC mp_token_kind_t mp_debug_value;
+
+void mp_set_debug(bool value) {
+    mp_debug_value = value ? MP_TOKEN_KW_TRUE : MP_TOKEN_KW_FALSE;
+}
+
 // TODO replace with a call to a standard function
 bool str_strn_equal(const char *str, const char *strn, int len) {
     uint i = 0;
@@ -303,7 +310,7 @@ STATIC const char *tok_kw[] = {
     "while",
     "with",
     "yield",
-    NULL,
+    "__debug__",
 };
 
 STATIC int hex_digit(unichar c) {
@@ -687,9 +694,18 @@ STATIC void mp_lexer_next_token_into(mp_lexer_t *lex, mp_token_t *tok, bool firs
 
     // check for keywords
     if (tok->kind == MP_TOKEN_NAME) {
-        for (int i = 0; tok_kw[i] != NULL; i++) {
+        // We check for __debug__ here and convert it to its value.  This is so
+        // the parser gives a syntax error on, eg, x.__debug__.  Otherwise, we
+        // need to check for this special token in many places in the compiler.
+        // TODO improve speed of these string comparisons
+        //for (int i = 0; tok_kw[i] != NULL; i++) {
+        for (int i = 0; i < ARRAY_SIZE(tok_kw); i++) {
             if (str_strn_equal(tok_kw[i], tok->str, tok->len)) {
-                tok->kind = MP_TOKEN_KW_FALSE + i;
+                if (i == ARRAY_SIZE(tok_kw) - 1) {
+                    tok->kind = mp_debug_value;
+                } else {
+                    tok->kind = MP_TOKEN_KW_FALSE + i;
+                }
                 break;
             }
         }
diff --git a/py/runtime.c b/py/runtime.c
index 8852b7d80..3cdbd2230 100644
--- a/py/runtime.c
+++ b/py/runtime.c
@@ -69,11 +69,14 @@ const mp_obj_module_t mp_module___main__ = {
 };
 
 void mp_init(void) {
-    // call port specific initialization if any 
+    // call port specific initialization if any
 #ifdef MICROPY_PORT_INIT_FUNC
     MICROPY_PORT_INIT_FUNC;
 #endif
 
+    // __debug__ enabled by default
+    mp_set_debug(true);
+
     mp_emit_glue_init();
 
     // init global module stuff
diff --git a/py/runtime.h b/py/runtime.h
index 910a48544..a5d674303 100644
--- a/py/runtime.h
+++ b/py/runtime.h
@@ -54,6 +54,8 @@ typedef struct _mp_arg_t {
 void mp_init(void);
 void mp_deinit(void);
 
+void mp_set_debug(bool value); // sets the value of __debug__; see lexer.c
+
 void mp_arg_check_num(uint n_args, uint n_kw, uint n_args_min, uint n_args_max, bool takes_kw);
 void mp_arg_parse_all(uint n_pos, const mp_obj_t *pos, mp_map_t *kws, uint n_allowed, const mp_arg_t *allowed, mp_arg_val_t *out_vals);
 void mp_arg_parse_all_kw_array(uint n_pos, uint n_kw, const mp_obj_t *args, uint n_allowed, const mp_arg_t *allowed, mp_arg_val_t *out_vals);