Since you asked what you're missing: the single fact you put at the centre, that Japan's debt is held at home by its own savers and its central bank, is also what makes Japan a shaky template for the US. Same trap, different lungs.
Domestically-held debt is the most stable kind there is. Captive holders can't rotate into another sovereign, and the central bank can pin yields almost indefinitely. That's why Japan has carried 250% for years without a creditor run: domestic financing is structural slack, not fragility. The US is financed the opposite way, heavily by foreign creditors who can rotate out, which puts its pressure point on the bond side rather than the currency side. So the two run closer to mirror images than to a sequence. Japan's weak spot is the currency while its bond base holds. the US has the reserve currency Japan lacks, but a creditor base that can actually leave. Both central banks pick the slow death, that part holds. Which death, and how fast, is set by the financing structure, and that's the one variable where Tokyo and Washington are opposites.
The part I'd watch hardest is the one you flagged as unmeasurable: the carry trade. The 2024 tremor mattered less for its size than for what it revealed, a quarter-point was enough to move global markets, which tells you the position is crowded and one-way. The risk there is less the level of Japanese rates than the shape of the position, leveraged and single-direction, unwinding through one door at once. You can't price that tail ahead of time, which is exactly why it stays underpriced until it doesn't.
Since the carry trade is spread over every investment type, only those which are marginal will be unwound now. As long as the profits are still much higher than the spread, panic is unlikely to set in. First of all, everyone sees the writing on the wall and so will respond accordingly. But if your investment is up 20%, is a quarter point interest hike going to make you sell immediately? For some yes, and no doubt, for others, not yet.
Excellent explanation on Japan, did you read my comments on last week's essay? I need to check but have the figure of 300% debt in my mind. Regardless, the carry trade is indeed the biggest unknown consequence now. I still think that the new Japanese government is going to press on with economy expansion, funded by cash. Hence the dumping of Treasury Bonds - and the interest rate shift, honestly I have read that is a consequence of Trump's rudeness to the PM.
Then what happens?!!!
One thing I would love your take on is the emerging sub prime scenario. The AI goldrush has stimulated speculative data centres developments, mostly funded by banks rather than IPOs etc. with very obvious due diligence failures also emerging. All of a sudden annual reviews are flagging cold feet over loan terms and timescales, and silent on logistics and real world dependencies like the supply of diesel to fuel backup generators, or inadequate generation capacity and inadequate grid capacity likewise affected by current real world issues! Not so subtly, the banks are once again repackaging and offloading this debt targeting institutional investors. The regulators are doing nothing, and governments are saying that they want to deregulate 2010 controls further???!!!
As always, Jay, a fascinating read. I have been slowly orienting my stocks toward companies which will be needed even when things get bad. Stocks like oil companies, gold mining companies, and natural resource ETFs. Even a railroad, which is likely to thrive as transport via truck becomes even more expensive. I see many trains today where 60% or more of freight are containers/trailers.
I wondered why you didn't write about the Bank of Japan becoming the largest owner of Japanese stocks, but that would be a sort of sidebar away from your main discussion. I hope the Fed doesn't decide to follow that Japanese disaster. Bad enough the Treasury bought stock in Intel and some rare earth company. Ironic, buying stocks while your country is drowning in debt.
Just save in other things: Gold silver, commodity stocks. Basically anything needed regardless of price like oil, for example. Rental property is still good because your mortgage is a fixed interest rate but you can raise the rent over time and you own the underlying property.
Agreed… all of the above, but with all the insurance, energy and associated costs going up with real estate, not a fan… sure u can raise rents but when shit hits the fan who can afford to pay higher rents, not to mention u are capped on rental raises per year but they can double ur insurance, taxes and assessments.. Seen it happen here… many people under water.. Only so much u can raise rents, but no limits to how much they can extort….. Blessings… what a shit show?
May I ask If or How the underlying strength of the economy might influence the severity? I believe my Country (Canada) is in recession, the economy is falling and the debt is increasing. About 15- 20% of the debt is foreign owned . My thinking is that this scenario would make the problem you have identified worse? I then said to myself. Self, how can I protect myself should this problem occur here? I may have exacerbated that impact by investing mostly in Canadian stocks and bonds?
Sorry to jump in the conversation but I think your concern is valid.
Maybe mapping where the risk already sits can help? If your salary, house, pension, stocks, bonds, and currency are all tied to Canada, then a weak Canadian economy can hit from more than one direction.
Maybe looking at a few simple things like how much is connected to Canadian banks, Canadian real estate, Canadian government debt, and the Canadian dollar. Not pressing the panic button but to see if the exposure is bigger than it feels.
The BIG FAT CANARY is Okinawa. China will be delighted to help out Japan. Cash, treasuries, gold. All they ask is freedom, independence and complete demilitarization of Peace Island, formerly known as Okinawa.
Perpetually unaffiliated and weapons-free. Forever. Yah. Watch for that.
(1) Instead of selling US bonds, why can't Japan request a currency swap line from the US as the UAE did as you wrote in a previous piece.
(2) If the carry trade money goes back to Japan, it will strenghten the yen, won't it? So instead of a doom loop, they won't be forced to increase rates more.
Thanks. I think an important indicator you miss is govt deficit as % of govt revenue. A few % in JP, 5-10% in EU, and a whopping 34% in the US (according to Gemini's summary of Office of Budget Responsibility).
If the US got a decade late in the printing playbook, it is catching up fast.
Capacity to tax is important to avoid sinking the currency. Reserve status meant politicians never worked on that one. But that's another degree of freedom in the US. Count on Murphy's law here.
Since you asked what you're missing: the single fact you put at the centre, that Japan's debt is held at home by its own savers and its central bank, is also what makes Japan a shaky template for the US. Same trap, different lungs.
Domestically-held debt is the most stable kind there is. Captive holders can't rotate into another sovereign, and the central bank can pin yields almost indefinitely. That's why Japan has carried 250% for years without a creditor run: domestic financing is structural slack, not fragility. The US is financed the opposite way, heavily by foreign creditors who can rotate out, which puts its pressure point on the bond side rather than the currency side. So the two run closer to mirror images than to a sequence. Japan's weak spot is the currency while its bond base holds. the US has the reserve currency Japan lacks, but a creditor base that can actually leave. Both central banks pick the slow death, that part holds. Which death, and how fast, is set by the financing structure, and that's the one variable where Tokyo and Washington are opposites.
The part I'd watch hardest is the one you flagged as unmeasurable: the carry trade. The 2024 tremor mattered less for its size than for what it revealed, a quarter-point was enough to move global markets, which tells you the position is crowded and one-way. The risk there is less the level of Japanese rates than the shape of the position, leveraged and single-direction, unwinding through one door at once. You can't price that tail ahead of time, which is exactly why it stays underpriced until it doesn't.
Since the carry trade is spread over every investment type, only those which are marginal will be unwound now. As long as the profits are still much higher than the spread, panic is unlikely to set in. First of all, everyone sees the writing on the wall and so will respond accordingly. But if your investment is up 20%, is a quarter point interest hike going to make you sell immediately? For some yes, and no doubt, for others, not yet.
Excellent explanation on Japan, did you read my comments on last week's essay? I need to check but have the figure of 300% debt in my mind. Regardless, the carry trade is indeed the biggest unknown consequence now. I still think that the new Japanese government is going to press on with economy expansion, funded by cash. Hence the dumping of Treasury Bonds - and the interest rate shift, honestly I have read that is a consequence of Trump's rudeness to the PM.
Then what happens?!!!
One thing I would love your take on is the emerging sub prime scenario. The AI goldrush has stimulated speculative data centres developments, mostly funded by banks rather than IPOs etc. with very obvious due diligence failures also emerging. All of a sudden annual reviews are flagging cold feet over loan terms and timescales, and silent on logistics and real world dependencies like the supply of diesel to fuel backup generators, or inadequate generation capacity and inadequate grid capacity likewise affected by current real world issues! Not so subtly, the banks are once again repackaging and offloading this debt targeting institutional investors. The regulators are doing nothing, and governments are saying that they want to deregulate 2010 controls further???!!!
Great article
Really unfortunate there was not a Business Case to Sell Canadian Oil and Gas products to Japan !
Amazing article. Simple , crisp, easy to understand!! Thank you !
Great work as always Jay!!!
Great article and comments. The question is how long can the canary hold it's breath for.
Always love your articles. It’s so clearly explained. Thank you 🙏🏻
As always, Jay, a fascinating read. I have been slowly orienting my stocks toward companies which will be needed even when things get bad. Stocks like oil companies, gold mining companies, and natural resource ETFs. Even a railroad, which is likely to thrive as transport via truck becomes even more expensive. I see many trains today where 60% or more of freight are containers/trailers.
I wondered why you didn't write about the Bank of Japan becoming the largest owner of Japanese stocks, but that would be a sort of sidebar away from your main discussion. I hope the Fed doesn't decide to follow that Japanese disaster. Bad enough the Treasury bought stock in Intel and some rare earth company. Ironic, buying stocks while your country is drowning in debt.
So much for saving!!!
Just save in other things: Gold silver, commodity stocks. Basically anything needed regardless of price like oil, for example. Rental property is still good because your mortgage is a fixed interest rate but you can raise the rent over time and you own the underlying property.
Agreed… all of the above, but with all the insurance, energy and associated costs going up with real estate, not a fan… sure u can raise rents but when shit hits the fan who can afford to pay higher rents, not to mention u are capped on rental raises per year but they can double ur insurance, taxes and assessments.. Seen it happen here… many people under water.. Only so much u can raise rents, but no limits to how much they can extort….. Blessings… what a shit show?
May I ask If or How the underlying strength of the economy might influence the severity? I believe my Country (Canada) is in recession, the economy is falling and the debt is increasing. About 15- 20% of the debt is foreign owned . My thinking is that this scenario would make the problem you have identified worse? I then said to myself. Self, how can I protect myself should this problem occur here? I may have exacerbated that impact by investing mostly in Canadian stocks and bonds?
Sorry to jump in the conversation but I think your concern is valid.
Maybe mapping where the risk already sits can help? If your salary, house, pension, stocks, bonds, and currency are all tied to Canada, then a weak Canadian economy can hit from more than one direction.
Maybe looking at a few simple things like how much is connected to Canadian banks, Canadian real estate, Canadian government debt, and the Canadian dollar. Not pressing the panic button but to see if the exposure is bigger than it feels.
Just my two cents
The BIG FAT CANARY is Okinawa. China will be delighted to help out Japan. Cash, treasuries, gold. All they ask is freedom, independence and complete demilitarization of Peace Island, formerly known as Okinawa.
Perpetually unaffiliated and weapons-free. Forever. Yah. Watch for that.
Two things I don't understand.
(1) Instead of selling US bonds, why can't Japan request a currency swap line from the US as the UAE did as you wrote in a previous piece.
(2) If the carry trade money goes back to Japan, it will strenghten the yen, won't it? So instead of a doom loop, they won't be forced to increase rates more.
Japan is not the crisis.
Japan is the canary.
For decades, the global financial system survived on one assumption:
Debt could always be refinanced.
Liquidity could always be manufactured.
Volatility could always be suppressed.
Tokyo was the first major economy forced to test that assumption at scale.
Aging demographics.
Exploding debt-to-GDP.
Yield Curve Control.
Central bank balance-sheet expansion.
Currency weakness.
People keep staring at Japan because they think Japan is the exception.
That is the mistake.
Japan is the preview.
The world spent years mocking the BOJ.
Now nearly every major central bank is quietly drifting toward the same corner:
More debt.
More intervention.
Less market discovery.
Watch the JGB market carefully.
Not because Japan matters more than America.
Because stress always appears first where the system is stretched longest.
The canary does not create the gas.
It discovers it first.
Tokyo is not the story.
Tokyo is the warning.
Japan can also sell US treasuries to buy the oil
Thanks. I think an important indicator you miss is govt deficit as % of govt revenue. A few % in JP, 5-10% in EU, and a whopping 34% in the US (according to Gemini's summary of Office of Budget Responsibility).
If the US got a decade late in the printing playbook, it is catching up fast.
Capacity to tax is important to avoid sinking the currency. Reserve status meant politicians never worked on that one. But that's another degree of freedom in the US. Count on Murphy's law here.
Japan oil imports have shifted to Texas.