Financial encyclopedia

The yield on Japan's 10-year government bonds recently hit a multi-year high, immediately raising questions in the market: Will a rise in Japanese interest rates trigger a "debt spiral"? 

Japan has a huge debt. 

The Japanese government's debt has reached 250% of its GDP. In other countries, a debt crisis would have occurred long ago. 

However, what makes Japan unique is that:
the majority of its debt is held by domestic banks, insurance institutions and the central bank, with a relatively low proportion held by foreign investors. 

Therefore, Japan is less likely to experience a bond market crash due to the withdrawal of foreign capital. What the market is truly concerned about is not "being unable to borrow money". 

The real risk: 

When interest rates in Japan rise, the interest rates on newly issued bonds will also be forced to increase. If the government still needs to provide substantial support for social welfare and expenditures related to an aging population, the fiscal burden will naturally become heavier. 

The result may form a pressure cycle: 

Rising interest rates → expanding deficits → higher interest rates demanded by the market → further increase in debt costs 

This is close to the prototype of a "debt spiral". 

Has Japan entered a spiral? 

A true "debt spiral" requires the simultaneous satisfaction of three conditions: 

1) Long-term high inflation → Japan is forced to continuously raise interest rates
2) The Bank of Japan reduces bond purchases → The biggest buyer exits the market
3) Foreign capital starts to significantly reduce holdings → Pushes up long-term interest rates 

At present, Japan is only in the early stage of "normalization of the epidemic situation" and has not yet entered an out-of-control phase. 

④ Implications for the Market 

Although it has not yet constituted a crisis, the rise in Japanese bond yields has been sufficient to alter the direction of global capital flows. 

• US Treasuries are being repriced
• Volatility in the foreign exchange market is increasing
• Gold prices are more sensitive to changes in interest rate differentials 

When Japan moves, the whole world feels it.
The rise in Japanese bond yields has not yet constituted a crisis,
but it serves as a reminder to the market:
The global financial chain is quietly being rearranged, and Japan is becoming a key link that cannot be ignored.