Japan’s national debt on the brink as bond yields surge
Japan’s government debt has reached 215% of GDP, while the yield on 10-year bonds rose from -0.28% in 2019 to a peak of +1.92%, the highest since summer 2007, raising concerns of financial instability. To support the economy, Japan has launched a $135 billion stimulus program. Notably, the Bank of Japan is expected—with an 80% chance—to raise interest rates on December 19, a move that could trigger a collapse in the carry trade market.
The rising bond yields coupled with Japan’s high public debt level highlight growing financial risks for the country. While the stimulus aims to bolster the economy, the probable rate hike could cause significant market turbulence, especially affecting carry trade strategies that profit from interest rate differentials. This financial tension in Japan unfolds amid anticipated Federal Reserve decisions on December 10, though the Japanese sector could emerge as the true epicentre of an unexpected crisis.
The upcoming policy decision by the Bank of Japan will be crucial in determining market stability. A rate increase could trigger instability with potential global ripple effects, including impacts on cryptocurrency markets that often react sharply to such financial shocks.
