{"id":212750,"date":"2025-12-31T07:31:25","date_gmt":"2025-12-31T07:31:25","guid":{"rendered":"https:\/\/www.newsbeep.com\/il\/212750\/"},"modified":"2025-12-31T07:31:25","modified_gmt":"2025-12-31T07:31:25","slug":"debt-crisis-in-japan-robin-j-brooks","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/il\/212750\/","title":{"rendered":"Debt Crisis in Japan – Robin J Brooks"},"content":{"rendered":"

Long-term government bond yields have risen very sharply in Japan this year. Indeed, the 30-year yield is at its highest level EVER, which is causing consternation because – at the same time – the Yen has fallen to all-time lows in trade-weighted terms against its G10 peers. There are many people who see this decoupling as a sign that the Yen is now \u201cirrationally\u201d weak, including Japan\u2019s government, which recently put markets on notice that it might intervene to strengthen the Yen.<\/p>\n

I don\u2019t think this is right. The key point to recognize is that Japanese long-term yields – while they have risen a lot – are still way below where they would be if markets were able to freely set them. At the current juncture, the Bank of Japan (BoJ) remains a very large buyer of government bonds in gross terms, which means that longer-term yields are capped in practice. Rising risk of a debt crisis, which would ordinarily drive yields higher, can\u2019t get priced in the bond market and thus gets priced into the Yen instead. This is what\u2019s weighing on the Yen and means that the currency – not yields – is what to watch when it comes to gauging Japan\u2019s fiscal risk.<\/p>\n

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The chart above shows 30-year government bond yields for key advanced economies around the world. The red line shows Japan\u2019s 30-year yield has risen to all-time highs, which makes it natural to think that Japanese yields should be supportive for the Yen. That\u2019s not the case as the chart below shows. The scatter plot has gross government debt in 2024 on the horizontal axis and yesterday\u2019s 30-year government bond yield on the vertical axis. Even through gross debt in Japan is substantially above Germany, its yield is the same. This is the best illustration of how distorted Japan\u2019s bond yields are. They\u2019re nowhere near high enough given Japan\u2019s towering debt burden.<\/p>\n

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The key question is what market price is a better reflection of reality: long-term yields or the Yen? As the scatter plot above shows pretty clearly, Japanese government bond yields are far below where they should be. BoJ bond buying prevents markets from pricing a proper risk premium, which instead gets expressed in a beaten down Yen. This means that the unprecedented decoupling between long-term rate differentials and the Yen – shown in the chart below – is meaningless. The weak Yen is the signal to watch and it\u2019s signaling mounting risk of a debt crisis in Japan.<\/p>\n

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