{"id":3558,"date":"2026-08-13T17:38:10","date_gmt":"2026-08-13T17:38:10","guid":{"rendered":"https:\/\/trusteconomics.eu\/?p=3558"},"modified":"2026-08-13T17:38:10","modified_gmt":"2026-08-13T17:38:10","slug":"the-us-is-driving-japan-into-bankruptcy-the-debt-crisis-in-september","status":"publish","type":"post","link":"https:\/\/trusteconomics.eu\/index.php\/2026\/08\/13\/the-us-is-driving-japan-into-bankruptcy-the-debt-crisis-in-september\/","title":{"rendered":"The US is driving Japan into bankruptcy \u2013 The debt crisis in September"},"content":{"rendered":"\r\n\r\nThe US Treasury Department is joining forces with Japan to confront investors betting against the yen: but who really holds the stronger bargaining chips \u2014 Washington or Tokyo?\r\n\r\n \r\n\r\nAt the same time, it seems that the dollar system under Trump has become toxic and threatens the US\u2019s closest and most stable ally, having been driven to excessive debt to support it.\r\n\r\n \r\n\r\nTrump presents the first joint US-Japan currency intervention since 2011 as a \u201cmessage of friendship,\u201d a move that, he argues, will strengthen economies internationally. And indeed, violent fluctuations in the yen can prove extremely destabilizing.\r\n\r\n \r\n\r\nFew financial mechanisms act as a more powerful accelerator of instability than the so-called \u201cyen carry trade,\u201d a strategy that has led to the collapse of numerous hedge funds.\r\n\r\n \r\n\r\nTwo decades of near-zero interest rates have turned Japan into the world\u2019s largest creditor nation. Investors have borrowed cheaply in yen to seek higher returns abroad, pushing up valuations of Argentine bonds, South African commodities, Indian real estate, the New Zealand dollar, derivatives on the New York Stock Exchange, and even cryptocurrencies.\r\n\r\n \r\n\r\nWhen the yen rebounds sharply, those trades are cleared at lightning speed. Markets move one way when the yen moves the other.\r\n\r\n \r\n\r\nJapan is the largest foreign holder of U.S. Treasuries, with a portfolio of nearly $1.2 trillion. This exposure works both ways.\r\n\r\n \r\n\r\nIt is a huge responsibility to have so much of the nation\u2019s wealth tied up in a currency whose value is threatened by Trump\u2019s policies \u2014 including his efforts to bring the Federal Reserve under greater political control.\r\n\r\n \r\n\r\nAt the same time, however, Tokyo is well aware of the influence that comes with its position as America\u2019s largest financier.\r\n\r\n
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\"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n

Something big is happening\u2026<\/strong><\/p>\r\n \r\n\r\nScott Bessent\u2019s team has about $1.2 trillion to keep the yen\u2019s volatility in check. After more than 30 years of monetary intervention, the Japanese yen is on the verge of a free fall.\r\n\r\n \r\n\r\nLast week, the yen came dangerously close to breaking down a critical technical support level. A break below that level would pave the way for a full-blown collapse, sending the currency to levels not seen since 1990.\r\n\r\n \r\n\r\nJapan is doing everything it can to prevent such a scenario, resorting to ever-greater intervention in the currency markets. The problem, however, is that in order for the Bank of Japan (BoJ) to buy yen, it must liquidate assets to provide the necessary liquidity. And the assets Japan is liquidating are U.S. Treasuries.\r\n\r\n \r\n\r\nTo be clear, these are not small amounts. In one day alone, the BoJ spent a record $52 billion in a single day.\r\n\r\n \r\n\r\nIt is clear that the United States does not want to see the largest foreign holder of U.S. Treasuries go on a massive sell-off.\r\n\r\n \r\n\r\nThat is why last week the U.S. Treasury intervened actively in favor of the yen for the first time since the 1998 Asian Financial Crisis.\r\n\r\n \r\n

Mutually assured destruction<\/strong><\/p>\r\n \r\n\r\nThe timing could hardly be worse. Traders call this scenario \u201cmutually assured destruction\u201d: a massive sell-off would hit Japanese exporters hard and send interest rates soaring worldwide.\r\n\r\n \r\n\r\nIt also remains highly uncertain whether the first joint US-Japan intervention in 15 years will prove effective.\r\n\r\n \r\n\r\nOne reason is that both the Japanese and American sides seem to be acting more for show than with any real intention of steering markets.\r\n\r\n \r\n\r\nA typical example is the fact that the US sold euros to buy yen, rather than using dollars.\r\n\r\n \r\n\r\nAnd it is clear that unless the Bank of Japan finds the courage to raise interest rates above the current 1%, those betting on further yen weakness have every reason to question Tokyo’s determination to strengthen the currency.\r\n\r\n \r\n

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Japan\u2019s patience is running out\u2026<\/strong><\/p>\r\n \r\n\r\nIt\u2019s one thing for the US and Japan to call the yen \u201csubstantially undervalued\u201d and quite another for central banks to take the necessary steps to support it, says Thanos Chonthrogiannis, chief economist at Trust Economics.\r\n\r\n \r\n\r\nNevertheless, Sanae Takaichi\u2019s patience with Trump appears to be running out. Late last month, Trump imposed new tariffs of 10% to 12.5% \u200b\u200bon 60 trading partners, including Japan, which is supposedly a \u201cfriendly\u201d country. Tokyo was caught off guard.\r\n\r\n \r\n\r\nSanae Takaichi\u2019s government is working in good faith to put together the $550 billion package that Donald Trump demanded in exchange for tariff reductions. Japan is coordinating with JPMorgan and other US banks to structure the financing.\r\n\r\n \r\n\r\nHowever, domestic banks appear cautious, as their funding base is in yen, which makes it expensive to raise large sums in dollars to finance long-term infrastructure projects.\r\n\r\n \r\n\r\nThe Liberal Democratic Party (LDP) has every reason to feel that it is not receiving the recognition it deserves from an American president who is rapidly alienating his allies.\r\n\r\n \r\n

In the vortex of geopolitical developments<\/strong><\/p>\r\n \r\n\r\nAt the same time, Japan is right at the center of Trump\u2019s high-risk geopolitical initiatives. The country imports 95 percent of its oil from the Middle East, making it particularly vulnerable to both the conflict that is currently pushing up global energy prices and any rise in U.S. Treasury yields.\r\n\r\n \r\n\r\nThe White House should be aware that another collapse like that of Long-Term Capital Management (LTCM) could prove catastrophic. LTCM\u2019s 1998 collapse was triggered in part by a sharp rise in U.S. Treasury yields and was one of the most severe financial crises before 2008.\r\n\r\n \r\n\r\nA repeat of such an episode \u2014 which could be triggered by tariffs, inflation, or a clash with China \u2014 could make even the Lehman Brothers crisis of 2008 look like a mild financial crisis.\r\n\r\n

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\"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nToday, with the US national debt approaching record levels, inflation remaining high, and population growth slowing, Asia has good reason to be concerned about the US fiscal situation.\r\n\r\n \r\n\r\nTrump\u2019s Republican Party has abandoned any pretense of fiscal discipline. The political deadlock in Congress is even deeper than in 2011, when S&P stripped the US of its top AAA credit rating, effectively confirming warnings then by Chinese Premier Wen Jiabao about the need to protect China\u2019s vast dollar reserves.\r\n\r\n \r\n\r\nAt that time, the US national debt was less than $12 trillion, less than half its current level. Beijing eventually concluded that, in the event of a financial crisis, the United States had more to lose than China.\r\n\r\n \r\n\r\nJapan has made similar calculations in the past. In 1997, then-Prime Minister Ryutaro Hashimoto admitted to a New York audience that Tokyo had \u201cseveral times\u201d considered dumping US Treasuries to send a political message, even during intense negotiations over the auto industry.\r\n\r\n \r\n\r\nSanae Takaichi\u2019s Finance Ministry is also on high alert. A volume of Japanese state wealth equivalent to the annual GDP of Switzerland is invested in US government debt.\r\n\r\n \r\n\r\nAt the same time, Trump\u2019s policy mix\u2014inflationary tariffs, encroachments on the independence of the Federal Reserve, a weakening of the Internal Revenue Service (IRS), and the pursuit of trillions of dollars in new tax cuts\u2014is based on the assumption that Asian central banks from Tokyo to New Delhi will continue to be willing to finance Washington\u2019s ambitions. That assumption is looking increasingly uncertain.\r\n\r\n \r\n

Asia is watching and preparing to respond<\/strong><\/p>\r\n \r\n\r\nThe irony is obvious. A quarter of a century ago, Washington lectured Asia on crony capitalism, institutional opacity, and unaccountable governance.\r\n\r\n \r\n\r\nToday, Asia is watching with bewilderment as the United States undermines its own financial credibility with astonishing speed.\r\n\r\n \r\n\r\nPolicymakers across the region are considering various scenarios for how Trump\u2019s tariffs and erratic economic policy could upend their economies. For now, the damage Trump has done to equity markets may be less than the blow he has inflicted on bond markets.\r\n\r\n \r\n\r\nUnder normal circumstances, recession risks would favor bond markets, but the inflation caused by the tariffs has overturned that logic.\r\n\r\n \r\n\r\nMarkets are concerned that the Trump administration appears to be more tolerant of a recession or even extreme global economic turmoil than many had thought possible.\r\n\r\n \r\n\r\nOver the past year, the turmoil in bond markets has repeatedly forced the Trump team to back down.\r\n\r\n \r\n\r\nThere is also the view that part of Scott Bessent\u2019s drive to stabilize the yen is aimed at preventing a similar move by China.\r\n\r\n \r\n\r\nThis dynamic is reminiscent of the late 1990s, when global markets were deeply concerned that China would devalue the yuan. Such a development would trigger a new race of competitive devaluations in international currency markets.\r\n\r\n

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\"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n

Currency War<\/strong><\/p>\r\n \r\n\r\nAfter all, if one were Chinese President Xi Jinping and faced with mounting trade headwinds, why wouldn\u2019t one opt for a more favorable exchange rate? Especially when the \u201cbeggar-thy-neighbor\u201d policies of U.S. ally Japan provide him with political cover.\r\n\r\n \r\n\r\nSuch a development could lead to a currency war on a scale that markets have probably never seen before. When two of the world\u2019s largest economies jointly intervene in markets for the first time in more than a decade, it essentially tells investors that there are pressures building beneath the surface of the global financial system, not just a problem with an exchange rate.\u201d\r\n\r\n \r\n\r\nThe real question is when the most powerful bond vigilantes \u2014 that is, the central banks themselves \u2014 will start actively selling US government bonds.\r\n\r\n \r\n\r\nJapan and China are Washington\u2019s biggest lenders, followed by the United Kingdom, Luxembourg, the Cayman Islands, Belgium, Canada, France, Ireland, Switzerland, Taiwan and Hong Kong.\r\n\r\n \r\n\r\nIf markets perceive that any of these countries are selling US bonds \u2014 or even simply suspending their purchases \u2014 global credit markets could be thrown into chaos.\r\n\r\n \r\n\r\nIf Trump understands this danger, he has so far failed to show it to the Asian central bankers who, in effect, hold control of the US economy in their hands. As 2026 unfolds, the initiative for action may be more in Japan\u2019s hands than Trump\u2019s team believes.\r\n\r\n \r\n

The multi-trillion dollar question<\/strong><\/p>\r\n \r\n\r\nThe multi-trillion dollar question \u2014 as trillions of dollars in assets are valued based on the yen and Japanese government bond yields \u2014 is this: Was this intervention enough to de-escalate market tensions?\r\n\r\n \r\n\r\nThe answer appears to be a resounding \u201cno.\u201d\r\n\r\n \r\n\r\nJapan held one of the worst government bond auctions in decades. Without going into the technical details \u2014 as bond auctions are extremely complex \u2014 here\u2019s what happened:\r\n\r\n \r\n

    \r\n \t
  • Weak demand:<\/em> The bid-to-cover ratio (which measures how many bids were submitted relative to the number of bonds available) stood at 2.56, significantly below the usual average of 3.3, recording one of the worst performances in the last decade. This suggests that investors showed limited interest in these bonds.<\/li>\r\n \r\n \t
  • Large \u201ctail\u201d:<\/em> The difference between the price investors expected to pay and the final price at which the bonds were issued was the second largest since 2000. Simply put, the government was forced to accept a lower price (and therefore higher borrowing costs) than it had expected in order to complete the issue.<\/li>\r\n \r\n \t
  • Yields soar:<\/em> Weak demand has pushed the yield (i.e. interest rate) on these bonds to around 2.87%, nearing recent highs.<\/li>\r\n<\/ul>\r\n \r\n\r\nBond prices and yields move inversely; weak demand means falling prices and, by extension, rising yields.\r\n\r\n \r\n\r\nThe yield on the all-important 10-year Japanese government bond is now on a near-vertical upward trajectory. The final stage of Japan\u2019s massive public debt \u201cbubble\u201d appears to be approaching.\r\n\r\n
    \r\n
    \"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n

    The Great Debt Crisis is Just Around the Corner<\/strong><\/p>\r\n \r\n\r\nJapan is the most prominent example of excessive borrowing and extreme central bank intervention.\r\n\r\n \r\n\r\nThe United States reached a debt-to-GDP ratio of 100% for the first time in 2015.\r\nJapan had already reached this level in 2001.\r\n\r\n \r\n\r\nThe United States first introduced the Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) in 2008 to address its debt problems.\r\nJapan had implemented the same policies since 1999 and 2001, respectively.\r\n\r\n \r\n\r\nSince then, Japan\u2019s central bank, the Bank of Japan (BoJ), has effectively nationalized the country\u2019s entire financial system. Today, the BoJ:\r\n\r\n \r\n

      \r\n \t
    1. Holds more than 50% of Japan\u2019s public debt.<\/li>\r\n \r\n \t
    2. Is the largest shareholder in Japanese listed companies worldwide.<\/li>\r\n \r\n \t
    3. Is among the top ten shareholders in more than 90% of the companies in the Nikkei 225 index.<\/li>\r\n \r\n \t
    4. Has a balance sheet larger than Japan\u2019s Gross Domestic Product (GDP).<\/li>\r\n<\/ol>\r\n \r\n\r\nAll of these interventions have allowed Japan to accumulate a level of public debt that exceeds anything ever recorded. The public debt-to-GDP ratio stands at 215%.\r\n\r\n \r\n\r\nInterest payments on debt service constitute the second largest category of government budget expenditure \u2014 after social security spending \u2014 absorbing about 24% of the country\u2019s federal budget spending.\r\n\r\n \r\n\r\nSimply put, as worrying as the situation in the United States may seem in terms of public debt and monetary interventions, the situation in Japan is many times more intense.\r\n\r\n \r\n\r\nAnd, based on current data, Japan has a serious possibility of being the first country to enter a public debt crisis. In financial markets, nothing is free. Not even for central banks.\r\n\r\n \r\n\r\nWhen a central bank constantly intervenes in the bond market, it usually ends up sacrificing the value of the national currency, following the well-known strategy of \u201cinflating the debt away\u201d.\r\n\r\n \r\n\r\nSince the Bank of Japan stepped up its interventions in the government bond market in 2012, the Japanese yen has lost more than 50% of its value.\r\n\r\n \r\n\r\nAnd, as of this writing, the yen is sitting right on top of a critical technical support level. If it breaks below that level, it is very likely to enter a freefall phase.\r\n\r\n","protected":false},"excerpt":{"rendered":"

      The US Treasury Department is joining forces with Japan to confront investors betting against the yen: but who really holds the stronger bargaining chips \u2014 Washington or Tokyo? At the same time, it seems that the dollar system under Trump has become toxic and threatens the US\u2019s closest and most stable ally, having been driven … <\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[105,1227,59],"tags":[138,1067,237,39,454,54,48,121,747,141,943],"class_list":["post-3558","post","type-post","status-publish","format-standard","hentry","category-developed-economies","category-japan","category-proposed-fiscal-policies","tag-bonds","tag-carry-trade","tag-economy","tag-government-bonds","tag-investments","tag-japan","tag-monetary-policy","tag-public-debt","tag-tariffs","tag-usa","tag-yen"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t