While much of the attention of crypto and traditional markets remains in the United States, a recent analysis of a leading economist suggests it is time to look east.
Japan is teeming on the edge of a debt crisis, but a potential recession in the United States could give the country with the rising sun a temporary relief window, according to Robin Brooks, Senior Fellow in the Global Economy and Development Program at the Brookings Institution.
Japan’s debt to BDP is a problem
For years, Japan has kept the highest public debt-to-BNP ratio between advanced economies that consistently hover over 200%. However, in the post-covide era marked with massive tax expenses, investors’ tolerance for such high debt levels has disappeared.
To complicate cases, Japan’s inflation, measured by the Consumer Price Index (CPI), has risen since mid -2022, bringing inflation rates up to levels not seen since the 1980s. The trend is in line with the sticky priests all over the world.
The increased inflation has pushed government bonds to provide higher and increased the cost of further tax borrowing. These combined pressure has thrown Japan’s staggering debt-to-BNP ratio of about 240% in the limelight, which effectively boxes the government in a difficult position.
Brooks expressed it best in its latest support post: “The lower line is that unusually high government debt puts Japan in a terrible bond. If Japan clings with low interest rates, it further risks the Yen depreciation, which can cause inflation to run out of control.
“This catch-22 means a debt crisis is much closer than people think,” he added.
Growing debt concerns can lead investors to alternative economic escape valves such as cryptocurrencies, mainly stableecoins. The Japanese start -up JPYC plans to issue the first stableecoin tied to yen later in the year.
Yen has appreciated by almost 7% to 146.50 per year. US dollar this year, as expectations of bold-rate cuts have led to a broad-based dollar sale.
However, Zooming Out tells a completely different story. Since 2021, the yen has been discouraged by a solid 41%, adding domestic inflation.
Meanwhile, the 10-year-old Japanese bond yield rose to 1.60% from nearly zero by 2020 and reached its highest level since 2008. The 30-year-old dividend has also hit high decades. In other words, investors demand a higher premium to lend money to the government to compensate for the growing tax risks.
US recession can offer temporary relief
Japan can find some relief in a potential US recession, characterized by consecutive quarterly contractions in GDP. Such a situation would see investors around the world Park money in government bonds and driving yields lower. (Bond yields and prices move in opposite directions).
The resulting fall in Japanese yields could then buy time for Japan, according to Brooks.
“It is possible that the United States is going into recession, which will cause us to fall global yields falling. It will buy Japan time. But – eventually – the only sustainable way out of this catch -22 is for Japan to cut down on spending and/or raise the tax,” Brooks noted.
Still remains the big question: Will Japanese citizens accept higher taxes and cuts in spending? Only time will show.
