Japanese vs. US: Which Are More Cooked?

No one wants Japan’s sovereign debt. 

The global sovereign bond collapse appears to be rapidly worsening. The Bank of Japan (BoJ) owns more than half of its own government bonds, desperate to prop up the economy by buying domestic debt that nobody else wants. But no central bank can prop up an economy forever.

Japan has a long-running fiscal problem which has only gotten worse, ending its epic run of negative interest rate policy in 2024. It seems that fewer and fewer people are interested in holding US debt, but this year’s bond selloff is extending to other countries as well, including Japan.

Japan has no good options after over a decade of aggressive monetary easing, including quantitative easing and yield curve control, aimed at combating deflation and stimulating growth. By purchasing Japanese government bonds, the BoJ kept yields artificially low, enabling the government to finance its staggering debt at minimal cost. However, as inflation in Japan rises, the BoJ is faced with a delicate balancing act: “normalizing” policy without triggering a fiscal crisis in a heavily indebted economy. Now, sovereign bond markets all around the world are showing serious signs of trouble.