Japan Is Sitting on a Debt Bomb. Nearly ¥11 Million per Person
Japan has set another historic record. Central government debt reached approximately ¥1,346.7 trillion at the end of June.
When divided by the country’s population, this amounts to roughly ¥10.95 million per person — including children.
Of course, this does not mean that every Japanese citizen will receive a bill for ¥10.95 million. However, it is a very clear way to illustrate the scale of the liabilities the Japanese government has accumulated over decades.
And it is precisely the size of this debt that is becoming increasingly important for monetary policy, the Japanese yen, and global financial markets.
Numbers That Can No Longer Be Ignored
Japan’s Ministry of Finance had already reported that the total volume of government bonds and other liabilities exceeded ¥1,340 trillion. The largest portion consists of government bonds themselves.
The problem is not only the absolute size of the debt.
For many years, Japan was able to sustain extremely high levels of debt thanks to an environment of virtually zero interest rates. The government could finance itself cheaply, while the Bank of Japan kept a huge part of the government bond market under control.
But this era is gradually coming to an end.
Yields on Japanese government bonds are rising, and the Bank of Japan is attempting to gradually normalize its exceptionally loose monetary policy. At the same time, concerns are growing that higher interest rates will gradually increase the cost of servicing Japan’s enormous government debt.
The Bank of Japan Faces a Very Uncomfortable Equation
Japan’s central bank is caught between several conflicting problems.
If it keeps interest rates too low, pressure on the Japanese yen and inflation could continue.
If it raises rates too quickly, rising bond yields could gradually make government financing more expensive.
And if the Bank of Japan were to intervene heavily in the market again and begin purchasing bonds to suppress their yields, it would risk returning to the very policy it is currently trying to leave behind.
This conflict is currently one of the most interesting macroeconomic stories in global markets.
And the Situation Is Already Changing Directly in the Market
Yields on long-term Japanese government bonds have risen significantly. Thirty-year JGB yields are now hovering around 4%, which is beginning to change the behavior of domestic investors and asset managers.
At the same time, the Bank of Japan plans to continue reducing the amount of government bonds on its balance sheet. The market will therefore have to absorb a larger amount of Japanese debt without the support it had become accustomed to over many years.
And this is where the real problem may lie.
It is not only about how much Japan owes.
What will matter most is at what cost Japan will be able to refinance this debt in the future.
⚡ XDIGR View
In our view, it is not correct to simply say that Japan will “go bankrupt.” Japan’s debt has a specific structure, is predominantly denominated in its domestic currency, and the country has its own central bank.
But that does not mean the current situation comes without a price.
It does — the only question is who will pay it and in what way.
Japan is entering an environment where every solution creates a problem somewhere else.
Higher interest rates may help the currency and the fight against inflation, but at the same time they increase pressure on public finances.
Lower interest rates make government financing easier, but they may once again put pressure on the yen and the purchasing power of the population.
Further massive bond purchases by the central bank could stabilize the market, but at the same time they could undermine the Bank of Japan’s efforts to return monetary policy to normal.
And that is exactly why we are watching Japan.
Not because of one record-breaking number, but because this is where government debt, interest rates, inflation, the exchange rate, and central bank policy all collide within a single system.
If one part of that system begins to crack more significantly, the impact may not remain limited to Japan.
Japan is one of the world’s largest holders of foreign assets, and changes in domestic yields can influence the decisions of Japanese investors as well as capital flows between Japan, the United States, and other markets.
What Are We Watching at XDIGR?
USD/JPY → Japanese government bond yields → the Bank of Japan’s next moves.
In our view, this combination will show whether Japan can gradually normalize its monetary policy or whether its record debt will become an obstacle that significantly limits the central bank’s room for further action.
¥1,346,700,000,000,000 is not just a record. It is a test of how long one of the world’s largest economies can operate with enormous debt at a time when cheap money is no longer something that can be taken for granted.
