Japan Searches for an Exit from Its Debt Miracle

Japan's debt miracle is running into a hard limit: the country needs low interest rates to manage its enormous obligations, but the rest of the world has moved into a tighter monetary cycle.

In the final days of July, Japan sold about $85 billion in U.S. dollar reserves and bought yen. Washington carried out a parallel operation. The intervention briefly halted the currency's decline, lifting it from 163 yen per dollar to 157. The relief, however, may prove temporary.

Concern about a financial crisis has been growing. Kenneth Rogoff, a Harvard economics professor and former chief economist of the International Monetary Fund, recently told Die Zeit that “a financial crisis is already taking shape in Japan.” Higher benchmark rates worldwide have put heavily indebted governments under particular pressure, including the United States and European Union countries, but Japan faces the greatest burden. According to the IMF, its debt equals 204% of GDP, the highest level in the world.

Experts remain divided on how immediate the danger is. Nobel Prize-winning economist Joseph Stiglitz and other left-liberal economists consider the problem less urgent, partly because Japan has issued most of its debt in its own currency. For years, that feature helped Japan avoid the financing crisis that might normally be expected from such a debt ratio. Even Stiglitz, however, has advised Japan in recent years to reduce its debt.

The yen intervention offers a sign that concern has spread beyond Tokyo. The currency had weakened so much that it was beginning to weigh on the domestic economy, while policymakers searched for a way out. Japan's debt has exceeded 200% of GDP since 2010. That burden, Brookings Institution economist Robin Brooks writes, has forced the central bank to cap long-term government bond yields, preventing it from fully joining the post-pandemic global tightening cycle. In practical terms, Japan remains dependent on low rates to keep servicing its debt.

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A financial crisis is already taking shape in Japan.