The widespread market focus has been on the potential for a US recession, but analysts see Japan on the brink of a debt crisis.
Japan has long been known for having the highest public debt-to-GDP ratio among advanced economies, at around 240%.
In the post-Covid era, investors' tolerance for high debt is waning. Inflation has also surged since 2022, pushing government bond yields to their highest levels since 2008 and increasing the cost of government borrowing.
According to Robin Brooks of the Brookings Institution, Japan is now facing a trap when low interest rates could further depress the yen and strengthen inflation, while higher yields could threaten debt sustainability.
As evidence, the yen has strengthened almost 7% this year to 146.50 per dollar following expectations of a Fed rate cut. However, since 2021, the currency has fallen 41%, adding to the burden of domestic inflation.
Japan’s 10-year bond yield is now at 1.60%, its highest since 2008, while the 30-year yield is at a record high in decades. This is a sign that investors are demanding a higher premium for Japan’s fiscal risk.
Debt concerns have prompted investors to look to alternatives, including crypto.
Japanese startup JPYC plans to launch a yen-based stablecoin later this year.
Meanwhile, Bitcoin continues to gain traction as a ‘digital gold’, with investors’ narrative seeing it as a hedge against global debt and the fall in the value of fiat currencies.
If the US were to enter a recession with a series of GDP contractions, global investors are expected to reinvest in government bonds.
This could potentially lower yields and provide some relief to Japan, which is already struggling with debt, in the long term, as this uncertainty could continue to support demand for alternative assets like Bitcoin.
