Japan in Crisis
Only higher interest rates can stop the Yen from falling, but that risks a fiscal crisis
Against the US Dollar, the Japanese Yen is closing in on the lows it reached in 2024. In trade-weighted terms, the Yen is actually already weaker than it was then, because its current depreciation is against a Dollar that’s much weaker than back in 2024. It’s tempting to think that official intervention will stop this slide and Japan’s Ministry of Finance (MoF) is making noises in that direction. But any intervention will be just as ineffective as in the past. The Yen is falling because markets want to see interest rates rise, which are still at artificially low levels and don’t compensate investors enough for what they see as rising risk of default. Unfortunately, while higher interest rates may stabilize the Yen, they risk pushing Japan into a fiscal crisis. Japan is trapped.
The chart above is one I show frequently and highlights the crux of the problem. It plots gross government debt on the horizontal axis and the 30-year government bond yield on the vertical axis. Japan’s yields have been rising quickly, but they’re still much too low relative to its monstrous level of government debt. The easiest way to see this is to compare Japan (JP) to Germany (DE). German debt is far below that of Japan, but its 30-year yield is actually slightly above Japan. Ongoing purchases of government debt by the Bank of Japan (BoJ) are preventing yields from rising to the level markets want to see. As long as yields are kept artificially low, depreciation pressure on the Yen will persist regardless of whether there’s official FX intervention or not.
Of course, allowing yields to rise is a poisoned chalice, because it risks pushing Japan into a fiscal crisis. Japan quite simply can’t afford for the BoJ to step back from buying bonds entirely, because no one knows how far yields may rise. There is a way out from this conundrum, however. As I noted in this post, Japan’s net debt is far below gross debt, because Japan’s government holds lots of assets. The way forward for Japan is to sell some of those assets and use the proceeds to reduce gross government debt.
Japan’s net debt stands at 130 percent of GDP versus gross debt around 240 percent. Much of this is illiquid and can’t be sold at short notice. But even a gesture in this direction will make a big difference for the Yen. This is the way forward for Japan. Not official FX intervention, which will be just as ineffective as in the past.
BoJ is not purchasing infact has been reducing its balance sheet of late.
Theories without numbers don't work
I always enjoy your posts - find them very helpful in trying to understand the landscape around this problem.
I asked Claude about your post above to see what the new-fangled tech might say.
I'll be the first to admit I'm no expert in this area so I thought I would ask an expert what he thinks about Claude's response. I hope you don't mind. You're the most articulate expert in this area I know. Feel free to ignore this post if it rubs you the wrong way.
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Me: "Why doesn't the Japanese government simply sell some of its debt as described in this commentary: https://robinjbrooks.substack.com/p/japan-in-crisis?utm_source=substack&utm_medium=email8:09 PM
CLAUDE: I'll fetch that article to see the specific proposal being discussed.
The commentary suggests that Japan should sell government-held assets and use the proceeds to reduce gross government debt Substack, noting that while Japan's gross debt is around 240% of GDP, its net debt is only 130% of GDP because the government holds substantial assets.
There are several reasons why Japan hasn't simply implemented this approach:
Political and structural challenges: Selling major government assets is politically contentious. These assets include stakes in corporations, real estate, infrastructure, and various financial holdings that often serve specific policy purposes or have constituencies defending them.
Asset liquidity and valuation: As the article acknowledges, much of Japan's asset portfolio is illiquid and can't be sold quickly without potentially depressing prices. Fire-selling assets could mean getting poor value and undermining the very fiscal improvement being sought.
Strategic considerations: Many government assets serve important functions beyond their balance sheet value—postal savings systems, development banks, pension fund investments, and infrastructure that supports economic activity. Selling them could compromise policy tools the government values.
Market absorption capacity: Even if Japan wanted to sell substantial assets, the market would need to be able to absorb them without significant price disruption. Large-scale asset sales could flood markets and depress valuations.
Uncertain effectiveness: While reducing gross debt might help confidence somewhat, the core problem is the sustainability of Japan's fiscal position given demographics and growth prospects. Asset sales are a one-time measure that doesn't address ongoing structural deficits.
The author presents this as a relatively straightforward solution, but in practice, governments typically view such asset sales as a last resort rather than a first-line response, partly because once those assets are sold, that policy option is gone.
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My Followup Q: To what degree does the Japanese government own debt in corporations, real estate, infrastructure, and various financial holdings
Based on the search results, the Japanese government owns substantial assets across multiple categories. Here's what I found:
Major Government Holdings
Corporate Stakes:
The government holds approximately 36% of Japan Post Holdings as of March 2024, which in turn owns about 61.5% of Japan Post Bank, giving the government an effective 22% economic interest in one of Japan's largest banks with roughly ¥200 trillion in assets.
The government is required to hold at least one-third to one-half of shares in special companies like Nippon Telegraph and Telephone (NTT) and Japan Tobacco (JT) Jcer
The Bank of Japan itself is 55% government-owned, and through its ETF purchases may have become an influential indirect shareholder in many Japanese corporations
Pension Fund (GPIF):
As of September 2025, the Government Pension Investment Fund had ¥277 trillion ($1.87 trillion) in assets under management Wikipedia, making it the world's largest pension fund
In fiscal 2023, the GPIF portfolio consisted of roughly 27% domestic bonds, with the remainder split among domestic equities, foreign equities, and foreign bonds.
The GPIF has approximately $13.5 billion invested in infrastructure assets, $8.2 billion in real estate, and $5.6 billion in private equity as of March 2024 .
Direct Government Assets:
Government investment totals 104.75 trillion yen, accounting for 76.1% of all government assets, with 103.8 trillion yen in non-administrative assets including rights and shares in incorporated administrative agencies and special law corporations
The government owns extensive public infrastructure including schools, public offices, waterworks, sewer systems, and transportation assets, though these are primarily held for public service rather than as sellable financial assets.
Why Not Simply Sell?
The challenge is that while Japan's gross debt is around 240% of GDP and net debt is 130% of GDP (a 110 percentage point difference), most of these assets serve critical functions:
Strategic corporations like NTT and Japan Post provide universal service obligations
GPIF assets are pension reserves needed for future retiree payments
Infrastructure assets are essential public services
Many holdings are illiquid and couldn't be sold quickly without depressing valuations
The government could theoretically sell more of its stakes in partially privatized companies like Japan Post Holdings, NTT, or JT, but these holdings are relatively small compared to the scale of debt reduction needed, and often come with legal requirements to maintain certain ownership levels to ensure universal service provision.