The End of the Road for Japan
Japan's latest fiscal stimulus is sending the Yen into a new devaluation spiral
Japan’s new prime minister - Sanae Takaichi - is planning a large fiscal stimulus that includes energy subsidies and cash handouts for households. At this point, the exact size of what’s coming is uncertain because parliament still needs to sign off, but - no matter what happens - it’s clear there’ll be more debt-financed stimulus, which is how Japan ended up with government debt at 240 percent of GDP in the first place.
Here’s the problem. As I’ve flagged for many months, we’re in the early stages of a global debt crisis. Longer-term bond yields are rising as markets grow increasingly fearful that high debt levels will be inflated away. A desperate search for safe havens is underway, which is what the “debasement trade” is all about. That’s what’s driven precious metals prices through the roof and is why countries with low government debt (Switzerland, Sweden, Denmark) are suddenly in vogue. In other words, patience is running out for governments whose only solution to a debt overhang is to spend more. That just doesn’t cut it. Japan is reaching the end of the road on this.
Why has Japan reached the end of the road on fiscal stimulus? The reason is that the Bank of Japan (BoJ) remains a big buyer of government debt as the chart above shows. This means Japanese yields are being kept artificially low by the BoJ and would be much higher without this intervention. That would plunge Japan into a debt crisis, which the current and past governments are unwilling to confront. Instead, it’s more convenient to use the BoJ to artificially cap yields. The problem is that this doesn’t fix the underlying problem, which is over-indebtedness. It just transmogrifies what would be a crisis in the bond market into a currency crisis.
It’s gone under the radar, but if you look at the Japanese Yen in real effective terms, which means factoring in how it stands against all currencies around the world taking into account inflation differentials, the Yen is almost as weak as Turkish Lira, which is the single worst performing currency globally after President Erdogan eviscerated his central bank. The black line in the chart above is the Yen in real effective terms, while the Turkish Lira is in blue. For perspective, the British Pound is in red.
More fiscal stimulus means more debt, which - ordinarily - would mean higher yields. But those are already artificially low and more fiscal stimulus means this distortion will only grow as BoJ is forced to ramp up buying to keep a lid on yields. So the Yen is resuming is devaluation spiral and closing in on its all-time low from mid-2024.
If Sanae Takaichi really wants to make Japan stronger, it’s time to make some hard decisions, which means raising taxes, cutting spending and selling Japan’s abundant state assets. Just doing more of the same - yet another stimulus - just doesn’t cut it.
For 30 years the Japanese got used to price stability…menus painted on walls. Covid, the oil price shock and the yen devaluation ended that era. Until there’s a new anchor, a shock like the realization that more of the same won’t cut it could cause prices and the exchange rate to spiral.
Great thesis! But is it a nothing burger???
The “global debt crisis” narrative is early — and probably wrong in its most apocalyptic form — because it assumes the same old triggers will play out the same old way. But the playbook has changed.
Debt crises historically happen when one of three things breaks:
Inflation credibility (not happening)
Funding access (not happening)
Political legitimacy (not happening)
None of these are broken in Japan (or most of the developed world) right now.
And there are no visible cracks forming. (I don’t see any cracks!)
What we’re seeing instead is term premium normalization + structural supply (post-QE bond issuance + demographics + central banks stepping back).
That’s not a revolt; it’s just gravity reasserting itself after 15 years of artificial suppression.Your base case (60–65%) is exactly where I’d put the probability distribution too:
Gradual, messy normalization
Yields creep higher but stay manageable
Yen weakens structurally but doesn’t crater
Fiscal patches continue forever
Growth stays mediocre forever
No crisis, no collapse — just endless muddling through
That’s not a failure of the system. It’s the success of the system at avoiding pain. The system has become extremely good at kicking the can — and extremely bad at doing anything else.
The real tragedy (and the part the doomers miss) is that managed stagnation can last a very long time — long enough to turn into managed decline without ever crossing the threshold into crisis.Japan has already shown us the template:
Debt-to-GDP > 250%
Interest payments still only ~7–8% of budget (because rates are still low)
No default, no hyperinflation, no revolution
Just… slower and smaller everything, year after year
And the scariest part is that the rest of the G7 is now quietly adopting the same playbook.Bottom line, plain English:We are not heading for a 1994-style bond massacre or a 1980s-style inflation crisis.
We are heading for a Japan-style slow bleed — one where the patient never dies, but also never really lives.And the world’s policymakers are increasingly comfortable with that outcome.Because the alternative — real reform, real normalization, real pain — is politically radioactive.
So, they’ll keep doing just enough to survive. Forever. Until one day “forever” turns out to have been a very long time indeed.