Recent vibrations in the $7.3 trillion Japan government bond market have given rise to fears that a debt crisis is developing in the world’s fourth largest economy.
Japan’s debt is already more than 200% of GDP, and Prime Minister Sanae Takaichi’s plans for new fiscal stimulus are anticipated to widen the gap. With snap elections approaching on Feb. 8, her opponent is also promising a similar agenda as economic growth remains sluggish.
Investors have started to hesitate, with JGB yields surging recently amid a series of weak debt auctions over the past year. Last month, bonds dropped so significantly that yields spiked approximately 25 basis points in a single session, prompting Treasury Secretary Scott Bessent to call his Japanese counterpart as panic began to spread across global markets.
“Yet the JGB has distinctive features working in its favor, which reduce the likelihood that the next debt crisis will originate in Japan,” Yardeni Research stated in a note on Tuesday, listing several reasons.
A crucial 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 more than half of all outstanding JGBs.
In addition, benchmark interest rates remain at a relatively low level of just 0.75% even after recent increases. Another reason maintaining the stability of the JGB market is the range of reliable buyers.
“For decades now, JGBs have been the main asset preferred by local banks, corporations, local governments, pension funds, insurance companies, universities, endowments, the postal savings system, and retirees,” Yardeni wrote. “This mutually-assured-destruction dynamic discourages most from selling debt.”
Japan also has substantial assets such as foreign-exchange reserves that could theoretically be sold to retire some of its debt, while the Ministry of Finance has also shown an ability to use various strategies to cap yields, such as currency interventions and “rate checks.”
Still, Japan can’t rely on these advantages indefinitely, Yardeni cautioned. The government has yet to address reforms that would ease the debt burden, enhance productivity, and boost long-term economic growth.
“The longer Japan focuses on treating the symptoms of its problems rather than their underlying causes, the greater the risk of a debt setback,” it added.