This ‘mutually assured destruction’ threat in the $7.3 trillion JGB market helps prevent Japan from triggering a debt crisis — for now

Recent tremors in the $7.3 trillion Japan government bond market have raised fears that a debt crisis is brewing in the world’s fourth largest economy.

Japan’s debt is already more than 200% of GDP, and Prime Minister Sanae Takaichi’s plans for fresh fiscal stimulus are expected to deepen the hole. With snap elections coming up Feb. 8, her opponent is also promising a similar agenda as economic growth remains muted.

Investors have started to balk, with JGB yields surging lately amid a string of weak debt auctions over the past year. Last month, bonds tumbled so much that yields spiked about 25 basis points in a single session, prompting Treasury Secretary Scott Bessent to call his Japanese counterpart as panic began to spread through global markets.

“Yet the JGB has unique features going for it, which limit the odds that the next debt crisis will be made in Japan,” Yardeni Research said in a note Tuesday, listing several reasons.

A key mitigating factor is that at least 90% of JGBs are held domestically, limiting the risk of capital flight. In fact, the Bank of Japan owns over half of all outstanding JGBs.

In addition, benchmark interest rates remain at a relatively low level of just 0.75% even after recent increases. Another reason keeping the JGB market stable is the array of reliable buyers. 

“For decades now, JGBs have been the main asset favored by local banks, corporations, local governments, pension funds, ...