{"id":420642,"date":"2026-01-21T10:58:12","date_gmt":"2026-01-21T10:58:12","guid":{"rendered":"https:\/\/www.newsbeep.com\/us\/420642\/"},"modified":"2026-01-21T10:58:12","modified_gmt":"2026-01-21T10:58:12","slug":"the-road-to-ruin-for-japan","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/us\/420642\/","title":{"rendered":"The Road to Ruin for Japan"},"content":{"rendered":"

Japan will go to the polls on February 8. Prime Minister Takaichi is running on an end to \u201cexcessive\u201d fiscal austerity. That\u2019s highly irresponsible. I\u2019ve been flagging for a long time that we\u2019re in the early stages of a global debt crisis<\/a>. Long-term government bond yields have risen sharply everywhere. Markets are losing patience with governments that are chronically unable or unwilling to bring public debt down. This is no time to pretend Japan\u2019s humungous debt isn\u2019t a problem. Denial isn\u2019t a plan.<\/p>\n

Yet denial<\/a> is the only plan Japan seems to have. It\u2019s almost certain that the Ministry of Finance (MoF) will intervene to lift the Yen. This can\u2019t work because the Bank of Japan (BoJ) is still printing<\/a> money to buy government bonds in substantial size. This puts depreciation pressure on the Yen. As long as that\u2019s going on, MoF intervention will be ineffective. Even worse, it makes Japan look incoherent, with the BoJ weakening the Yen even as the MoF tries to strengthen it.<\/p>\n

\"\"<\/a><\/p>\n

All this denial came to a head yesterday. News of the election spiked long-term bond yields. The blue line in the left chart above shows the 30-year rate differential of Japan vis-\u00e0-vis its G10 peers. The black line is the trade-weighted Yen versus the G10, where I use the same weights in the rate differential and the currency basket, i.e. the two are directly comparable. The right chart shows the same data, except that it looks at daily changes, which for the rate differential are shown in basis points on the horizontal axis and in percent on the vertical axis for the trade-weighted Yen.<\/p>\n

The crazy thing about yesterday is that the Yen fell even though Japanese interest rates rose very sharply. Higher interest rates should attract inflows and – on average – strengthen the Yen. Indeed, that\u2019s the case historically, as the upward-sloping line in the right chart attests. The fact that the Yen fell yesterday means we\u2019re firmly in fiscal crisis territory in the same way the UK was in 2022. It\u2019s worth noting that yesterday\u2019s fall in the Yen would have been worse had markets not simultaneously been selling the Dollar due to the tensions over Greenland. The \u201ctrue\u201d extent of Yen weakness is therefore likely to have been far greater.<\/p>\n

Japan\u2019s denial on debt is firmly entrenched. If yields rise further, this could send Japan into a full-blown debt crisis, so the BoJ will be asked to cap yields before we get there. But this artificial yield cap just shifts the fiscal risk premium from the bond market to the currency. The Yen<\/a> is the ultimate victim<\/a> in Japan\u2019s denial. <\/p>\n

There is a way out for Japan. As I noted in a recent post<\/a>, the government has lots of financial assets it can sell. Net debt is 130 percent of GDP, far below gross debt of 240 percent. Not all of these assets are liquid and can be sold quickly, but some of them are. This is where Japan needs to start its journey back to fiscal health. Sell those assets and use the proceeds to pay down the debt overhang.<\/p>\n","protected":false},"excerpt":{"rendered":"Japan will go to the polls on February 8. Prime Minister Takaichi is running on an end to…\n","protected":false},"author":2,"featured_media":420643,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[36],"tags":[28,101],"class_list":{"0":"post-420642","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-business","9":"tag-economy"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/420642","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=420642"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/420642\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/420643"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=420642"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=420642"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=420642"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}