© TrendCompass
© TrendCompass
Bank of Japan owns some 52% of all JGBs outstanding and around $1.2 trillion in U.S. treasuries (as of October 2025). In effect, the BOJ has been monetizing government debt. In the process, Japan has accumulated the highest ratio of public debt to GDP of any developed country: a whopping 260%. In other words, Japan's public debt is now 2.6 times the size of the annual output of her entire economy.
The "carry trade" unwind tsunami
Japan has also been the source of the so-called carry trade: Japanese and foreign investors borrowed funds in Japan at very low interest rates, and invested them elsewhere around the world where return on capital was considerably higher. By today, Japan's $7 trillion JGBs market has been the ultimate source of the colossal carry trade exposure that could cause unprecedented market turmoil. U.S. markets could be among the most vulnerable. According to Bloomberg, U.S. carry trade exposure totals some 342 trillion yen, corresponding to about 2.25 trillion U.S. dollars.
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All these balances accumulated during the "good old days" of zero interest rates when market participants didn't have a care in the world about the bulging debts: it was all free money, going around in nearly unlimited amounts. But as Ludwig von Mises correctly pointed out,
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.Today, the reversal of Japan's zero interest rates policy and all that it entailed, is accelerating. This month, the yield on 10-year JGB hit over 2.3%, the highest level since 1997. Now, the cost of servicing Japan's public debts consumes around 25% of the government's budget. Rather than providing economic stimulus, the Bank of Japan has reversed its QE policy and has begun aggressively reducing its colossal balance sheet.
One of the unintended outcomes of BOJ's aggressive QE policy has been the steady depreciation of the yen, in spite of rising interest rates. Now, to defend the yen and to keep their bonds markets from collapsing, the Bank of Japan and other Japanese financial institutions must scramble to repatriate their foreign investments, including stocks, bonds, ETFs and ultimately even US government treasuries, since they represent the largest and most liquid foreign asset Japan owns. In a crisis, Japan will be forced to liquidate their US Treasury investments.
Western nations will follow Japan's policies
This is an inevitability, as Ludwig von Mises predicted. The ultimate consequences of this crisis would be difficult to forecast, but given the magnitude of imbalances that are now present in global markets thanks to 26 years of Japan's massive QE, the contagion from Japan could hit the whole global economy like a tsunami. In response, the governments of other Western nations might have to resort to the same policies as the BOJ.
When Japan yanks liquidity from under their markets, their central banks will have to ramp up their own printing presses that much more. Ultimately, this process leads to an acceleration of inflation and/or hyperinflation. And by now, many governments will welcome inflation as it will enable them to get rid of their debts with a worthless currency.
Reader Comments
A person owes $50k on their house mortgage. Inflation moves up his wages from $20 an hour to $1000 an hour. (Yes, this can and has happened practically overnight in some countries.) He pays off his mortgage in less than two weeks. Government can do the same thing with their national debt.
Of course government loves inflation for several other reasons. For example, the person at $20 an hour pays 10% income tax. After the inflation raise to $1000 an hour, he pays 37% income tax.
Inflating money (all of it is) constantly decreases in value. It is ALWAYS worth less when you spend it than when you got it. Long story short: this difference in value from when money is received to when it is spent is the value stolen by the government - from everybody.