All the tittles below are behind a paywall and mostly lost among a flood of financial news, but make no mistake, something very wrong is brewing in Japan: The country is approaching slowly but surely the no return point of bankruptcy. But what exactly happened?
Following the implosion of its financial and real estate bubble in the 1990s, Japan reflated massively its shrinking economy. It didn't save the economy from deflation as the tsunami was so brutal, but it did save all the over-indebted dinosaurs, or zombie companies as they were called at the time, who instead of going belly up and selling their assets at a discount somehow succeeded in surviving the deflationary asteroid. But all this of course came at the staggering cost of exploding the JGB debt bubble and country global indebtedness which rose from slightly over 100% of GDP to 260%. On the account of future generations to pay back later...
Unfortunately today in 2025, the future has arrived and the time to pay is here. How do we know? After all, the 10 year JGB market has gone from the most liquid market in the world to one of the most manipulated with at times, recently, zero trading, day after day. But from time to time, Japan genuinely needs to sell new debt if only to avoid monetizing everything, and that's when suddenly everything went ugly in the last few weeks.
See, when you sell debt, we're talking 20 years, long term JGB here, you offer the bonds at a face value of 100 and a coupon or interest rate of say 2%. Now imagine that nobody wants to buy at this price, what happens? Well, simple, you lower the price, which raises the interest rate until a buyer emerges from the crowd. And lo, the mechanism worked and they did finally emerge, but not before the bond reached 3.6% of yield, a staggering level to say the least. As, if the full stack, (or should we say mountain?) of debt was revalued at such a level, Japan would almost instantly be bankrupt. In other words, the full Japanese government budget would not be enough to cover the interest of the debt.
Fortunately, this is not what happens in reality. Other interest rates rise or rather the price of existing bonds drop but not as much as that one pitiful auction indicates. Just a warning then? Almost, although of course, over time the lower price of bonds held by banks and insurance companies will affect their balance sheets and their ability to lend money. Eventually the system grind to a halt. The Central Bank will need to flood the market with money to avoid massive bankruptcies left and right, and sooner rather than later your money is worth nothing and you wake up one morning listening to the anthem of Zimbabwe!
As Hemingway famously said when asked how he got bankrupt: "Gradually, then suddenly!" Here, Japan is unfortunately approaching the end of the gradual stage! But step by step, one bad auction at a time. But one day, soon, we will reach the suddenly phase. Then, there will be no warning.
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