Earlier this month, global bond markets were rocked by remarks from Bank of Japan Governor Kazuo Ueda suggesting that the BOJ would soon weigh whether to raise interest rates. The resulting sell-off in the US bond market raised yields on ten-year and 30-year US Treasuries sharply.
Normally, mild comments by a mild-mannered Japanese central banker are not enough to perturb US and global markets. But the BOJ has a well-earned reputation as a canary in a coal mine. In February 1999, it cut interest rates to zero in a desperate effort to fend off deflation, anticipating the zero-interest-rate policies of other central banks when they, too, confronted the specter of deflation.
Today, the BOJ’s prospective move in the other direction could be indicating that not just Japan but also other heavily indebted economies, including the United States, are about to face sharply higher yields on government bonds, with all the difficulties that entails.
The Japanese government’s total debt as a share of GDP is on the order of 230%, twice that of the US. Net debt, subtracting the Japanese government’s assets, is a more manageable, if still high, 130%. Unfortunately, many of those government assets, such as landholdings, are illiquid, so they are of little comfort to public debt managers.
None of this was a problem so long as interest rates – and therefore debt-service payments – were at or near zero. But if interest rates now rise to, say, 4%, debt service will begin to strain the government budget. The BOJ has kept rates low through a combination of bond buying and yield-curve control, whereby it targets specific maturities where the debt is concentrated. Now that inflation is back, this de facto subsidy is ending.
There are no easy solutions to Japan’s debt problem. Taxes as a share of GDP are above the OECD average. An elderly population complicates any effort to cut pension and healthcare costs. And Japan, like other countries, now faces geopolitical pressure to spend more on defense.
The only way out is to boost the debt ratio’s denominator: GDP. Prime Minister Sanae Takaichi's fiscal stimulus is designed to jumpstart growth. Subsidies for electricity bills, cash handouts to households with children, and payments to government-licensed bear hunters (you read that right) will stimulate demand.
The question is how to stimulate supply. More immigration would help. So would policies that raise female and elder labour-force participation, comprehensive reskilling for older workers, deregulation of the service sector, and tax incentives for technology upgrading by small and medium-size enterprises. On the supply side, however, Japan is moving slowly, if at all.
So, the new government’s supplementary budget threatens to worsen the fiscal position instead of improving it. It may be premature to panic, but Mrs. Watanabe, that mythical investor in Japanese government bonds, now appears fully awake to the risks.
Moreover, what happens in Japan doesn’t stay in Japan. It is transmitted to the US via two channels. First, if yields on Japanese government bonds go up, they will become more attractive relative to US Treasuries, putting upward pressure on US interest costs. Second, the more difficulty Japan has in managing its debt, the more investors will begin worrying about other heavily indebted countries.
Fortunately, the US has an easy way out. In the US, unlike Japan, taxes as a share of GDP are below the OECD average. Closing even half the gap between the US and advanced-economy averages would eliminate the primary budget deficit (excluding interest payments) and stabilise its debt ratio.
Of course, tax increases are for the US what supply-side reform is for Japan: a political third rail. President Donald Trump’s administration has futilely sought to address the deficit problem by cutting government spending. The result has been to cut muscle rather than fat, gutting government and university spending on research and public services essential for productivity growth. The legacy of Trump’s “Department of Government Efficiency” has been zero progress in curtailing the deficit.
Democrats are now focused, appropriately, on the affordability crisis caused by higher food, health-care, and housing costs. But they also need to worry about the mortgage costs that will follow from higher interest rates, and about the politically toxic inflation that will occur on what they hope will be their watch, after 2028.
A tax on billionaires won’t close the budget gap and fend off these dangers. What is needed is a broad-based but progressive increase in taxes, together with that fabled closing of loopholes such as carried interest.
Implementing this will require a very different Congress and a very different president. A crisis often is needed to trigger the kind of political realignment that can deliver both. A debt crisis, during which inflation and interest rates shoot up, would certainly qualify. The question is whether US politics can realign in the absence of one.
Barry Eichengreen, Professor of Economics at the University of California, Berkeley, is the author, most recently, of In Defense of Public Debt (Oxford University Press, 2021). Project Syndicate, (c) 2025, published here with permission.
18 Comments
Japan’s very high public debt makes it an almost perfect real‑time test case for both the strength and limits of MMT claims about “no default risk” for a currency‑issuing government, but it does not cleanly validate the more ambitious MMT promise of easy full employment via deficits.
The standard crisis story (imminent default or buyers’ strike because the debt ratio is too high) has clearly failed so far in Japan, which aligns with the MMT view that such mechanical thresholds are misguided for a monetary sovereign. But Japan also undercuts stronger MMT claims that monetized deficits automatically deliver robust growth and full employment: decades of huge JGB issuance and BoJ balance‑sheet expansion have not produced a dynamic, high‑inflation economy, and there are growing concerns that prolonged financial repression and debt monetization have redistributed risks into asset markets and future generations rather than eliminating them.
Mrs. Watanabe, that mythical investor in Japanese government bonds, now appears fully awake to the risks.
Incorrect. "Mrs Watanabe" described Japanese retail traders started borrowing or margining in low‑interest‑rate yen and buying higher‑yielding currencies such as AUD, NZD, or EM FX, a classic carry trade. At their peak, these retail flows were large enough that professional traders and even central banks monitored their positions because they could affect yen crosses and broader capital flows.
Japanese households historically put money into postal savings and post office-linked bonds because they are seen as the safest, most convenient, and government‑backed way to store wealth. It has cultural elements that the Anglosphere will never properly understand.
Seriously frustrated with the terrible reckons on govt debt here. Folks, Japan runs a significant current account surplus. As a result, they accumulate offshore financial assets (like US Treasuries). That means Japan as a country has massive capacity for intervention in currency and bond markets. Literally untouchable.
So, they can run very large Govt debts, no worries at all. And, they can service those debts all day long by creating more debt.
To create more debt they have to sell bonds on the open market at an interest rates that compensates buyers for the perceived risk of losing their investment.
Japan has had relatively very low interest rates on long term bonds, a sign of their historically strong economy. Selling these bonds at low interest rates has racked up their large government debt.
But now their 10 and 20 year bond interest rates are going exponential. 10 year bonds are pushing 2%, 20 year bonds are pushing 3%. As they rise, a larger and larger % of their tax take is needed to pay the interest. Issuing more bonds just to pay interest on the old bonds is likely to push interest rate higher and higher. It's a death spiral.
Bad for Japan, but would likely cause a systematic shock to the world economy.
Japan have fixed interest rates across the yield curve wherever they wanted them to be for decades. There is not an open market for Japanese Bonds in any real sense. If you try apply broken macro economics theory to Japan, you end up with terrible takes.
But Japan has done okay - despite it's unorthodox approach. This is largely supported by domestic savers who maintain demand for government bonds. The BoJ buys the rest which limits exposure to foreign bond holders.
The current account surplus may help to support this overall by giving Japan the confidence to handle currency fluctuations.
I was not questioning whether Japan had 'done okay'. The other points here a bit muddled. Japanese bond sales are not 'supported by domestic savers' - Govt spending creates the deficits (adding bank reserves to the economy that earn basically no interest), the Govt then offers Bonds for sale that pay a little bit more interest. Those bonds get bought by primary dealers and onsold, and if there is insufficient demand for those bonds to hold bond prices / interest rates where Japan want them, the BoJ just buys the bonds.
Or, to put it more succintly, Govt deficit spending creates the dollars that are then used to buy bonds.
The current account surplus and high IIP position mean that Japan are armed to infinity for any bond or currency trader stupid enough to bet against them.
Where do you see Japan heading as the slow but continued diversion from the USD proceeds? Given they hold a good chunk of US debt it will be interesting to see what they choose to do.
You may wish to see who owns the bonds ....I doubt the Japanese gov and pension funds are too concerned about moving their funds from one pocket to another
But ultimately the usual suspects like the Insurance Companies also won't defy gravity and are pulling out because they're saturated with risky govt bonds and higher interest rates than they can get elsewhere.
https://www.bloomberg.com/news/articles/2025-04-28/volatile-bonds-push-…
look around the world and ask yourself what is less risky (and essentially guaranteed) than a well functioning government's bond?
Wasn't sure about the full veracity of your statement so I asked Chat GPT - here's the answer:
Japan’s ability to sustain very high public debt is reinforced by its persistent current account surplus and large net foreign asset position. As a net creditor nation, Japan faces no external financing constraint and has substantial capacity to stabilise its currency if needed.
This external position supports monetary sovereignty and allows the government to run large deficits at low interest rates, with most debt held domestically or by the Bank of Japan. While this does not eliminate real constraints such as inflation or demographics, it explains why Japan’s debt dynamics differ fundamentally from those of deficit countries dependent on foreign capital.
As a net creditor nation, Japan faces no external financing constraint and has substantial capacity to stabilise its currency if needed.
Japan has the world’s largest positive net international investment position (NIIP), and that is central to the JGB/BOJ sustainability story. NIIP is the difference between Japan’s external assets (FDI, portfolio equity and debt, reserves, loans, etc.) and its external liabilities (foreign holdings of Japanese assets). For Japan, the asset side is dominated by overseas portfolio and direct investments built up through decades of current‑account surpluses, while liabilities include foreign investors’ holdings of Japanese securities and direct investments in Japan.
The large positive NIIP means Japan earns substantial net investment income abroad. Think as to why Warren Buffet took positions in the Japanese trading companies.
And then there is the carry trade risk of a narrowing spread on intetest rate between Japan and the US.
Japan is a canary in the coal mine—but not for the dangers of government debt. Instead, it demonstrates that high public debt in a sovereign currency issuer does not automatically lead to inflation, financial instability, or private-sector crowding out.
Japan has used fiscal and monetary policy to maintain low unemployment, low inflation, and low interest rates over decades, despite debt levels far exceeding those typically considered “safe”. This challenges the orthodox view that governments must avoid high debt or face inevitable crisis.
Crucially, most Japanese government debt is held domestically—by households, institutions, and the Bank of Japan itself—limiting exposure to foreign capital markets. While this has delivered long-term stability rather than strong growth, it shows that inflation and real resource constraints, not debt ratios, are the true limits on public spending.
Gold. A university lecturer thinks governments and universities are muscle not fat, the US has an easy way out and that government spending has been cut. If he is muscle he is doing all the heavy lifting of a pork fillet.
"Excluding the early and middle 1990s, when Japan was engulfed in the aftermath of its real estate bubble, Japan’s growth per working-age adult from 1998 to 2019 outpaced that of the US
Japan’s weak economic performance over the past 25 years is not a mystery; it is merely the result of a declining population. Demographics shape destiny, even in terms of economic growth. In other words, Japan’s current economic situation (good performance of growth per working-age adult but poor total output growth) foreshadows the future of the US economy.
The consequences of significantly slower output growth will be severe for the US economy. While we consider output growth per capita when assessing welfare (and output per capita growth will not decline as sharply as total output growth), total output growth is crucial for addressing the funding of Social Security, Medicare, Medicaid, servicing our public debt, and financing our armed forces in the face of increasing international competition. Once we begin to contemplate the fiscal implications of a declining population, it becomes difficult to focus on anything else."
https://www.aei.org/op-eds/rapid-fertility-decline-is-an-existential-cr…
Japan’s weak economic performance over the past 25 years is not a mystery; it is merely the result of a declining population
This argument is something of a cop out. While it may be partially true, it cannot be definitively proven. F'more, with a declining popn, the share of national income per capita improves.
And given that Japan is an "infrastructure surplus", they have less they need to fork out for. Compare that to the Anglosphere, which all have infrastructure deficits. Partly by design. For ex, no public housing infrastructure helps support the respective Ponzis.
Once your working age population starts dropping it is very difficult to make up the difference. Countries like Italy have not seen "with a declining popn, the share of national income per capita improves".
"Between 1991 and 2019, Japan’s GDP grew at an annual rate of 0.83%, significantly lower than the US rate of 2.53%. The main driver of their weak economic performance? Japan’s dramatic demographic collapse.
Between 1991 and 2019, a combination of past low fertility and population aging led to a 0.54% annual decline in the number of working-age adults. Total hours worked fell at a similar rate of 0.43% per year; the gap between these figures reflects increased labor force participation among older workers and women.
In contrast, the US, bolstered by higher fertility rates and significant immigration, experienced an annual growth of 0.91% in its working-age population, with total hours worked increasing by 1.04%. Consequently, Japan’s GDP per working-age adult grew at a rate of 1.39% per year, compared to 1.65% in the US—a relatively minor gap. When measured by output per hour worked, Japan’s growth was at 1.26% per year, while the US recorded 1.53%."
https://www.sciencedirect.com/science/article/pii/S0014292125000121
https://www.aei.org/op-eds/rapid-fertility-decline-is-an-existential-cr…
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