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Recent tremors in the $7.3 trillion Japan government bond market have raised fears that a debt crisis is brewing in the world\u2019s fourth largest economy.<\/p>\n
Japan\u2019s debt is already more than 200% of GDP, and Prime Minister Sanae Takaichi\u2019s plans for fresh fiscal stimulus are expected to deepen the hole. With snap elections coming up Feb. 8, her opponent is also promising a similar agenda as economic growth remains muted.<\/p>\n
Investors have started to balk, with JGB yields surging lately amid a string of weak debt auctions over the past year. Last month, bonds tumbled so much that yields spiked about 25 basis points in a single session, prompting Treasury Secretary Scott Bessent to call his Japanese counterpart as panic began to spread through global markets.<\/p>\n
\u201cYet the JGB has unique features going for it, which limit the odds that the next debt crisis will be made in Japan,\u201d Yardeni Research said in a note Tuesday, listing several reasons.<\/p>\n
A key mitigating factor is that at least 90% of JGBs are held domestically, limiting the risk of capital flight. In fact, the Bank of Japan owns over half of all outstanding JGBs.<\/p>\n
In addition, benchmark interest rates remain at a relatively low level of just 0.75% even after recent increases. Another reason keeping the JGB market stable is the array of reliable buyers.\u00a0<\/p>\n
\u201cFor decades now, JGBs have been the main asset favored by local banks, corporations, local governments, pension funds, insurance companies, universities, endowments, the postal savings system, and retirees,\u201d Yardeni wrote. \u201cThis mutually-assured-destruction dynamic dissuades most from selling debt.\u201d<\/p>\n
Japan also has extensive assets like foreign-exchange reserves that could theoretically be sold to retire some of its debt, while the Ministry of Finance has also demonstrated a knack for employing various tactics to cap yields, such as currency interventions and \u201crate checks.\u201d <\/p>\n
Still, Japan can\u2019t take these advantages for granted indefinitely, Yardeni warned. The government has yet to tackle reforms that would ease the debt burden, improve productivity, and boost long-term economic growth.<\/p>\n
\u201cThe longer Japan treats the symptoms of its malaise rather than its underlying causes, the greater the risk of a debt stumble,\u201d it added.<\/p>\n
Meanwhile, Robin Brooks, a senior fellow at the Brookings Institution, has been sounding the alarm for months that Japan is already showing signs of a debt crisis.<\/p>\n
The reason why it\u2019s not showing up yet in the JGB market is because the Bank of Japan is still buying massive amounts of bonds, keeping rates from spiking as high as they should. Instead of a surge in yields, markets are pricing in a debt crisis by sending the yen lower.<\/p>\n
\u201cJapan\u2019s longer-term yields have been rising, but \u2014 on a risk-adjusted basis \u2014 that rise isn\u2019t nearly enough to stabilize the\u00a0Yen,\u201d he wrote in December. \u201cAnother way to say this: markets think risk of a\u00a0debt crisis\u00a0is rising sharply.\u00a0Yen\u00a0depreciation won\u2019t stop until yields are allowed to rise far more, forcing the government to pursue fiscal consolidation and bring down\u00a0debt.\u00a0Japan\u00a0needs to stop being in\u00a0denial.\u201d<\/p>\n<\/div>\n
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