Japan’s Money Is Collapsing — And The World Could Pay The Price

Japan’s Money Is Collapsing

For decades, Japan was the world’s source of cheap money.

Now, that money may be coming home.

And if it does, the consequences won’t stay inside Japan.

They could hit U.S. Treasury yields, mortgages, stocks, and almost every market that has benefited from Japan’s ultra-cheap money for the last 30 years.

The reason is something called the yen carry trade — one of the biggest and most important sources of global leverage.

And right now, Japan is starting to reverse it.

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Japan’s Economy Was Never Supposed to Work

Japan has one of the highest debt burdens in the developed world.

Its government debt is more than 200% of GDP.

By almost any conventional economic model, a country carrying that much debt should face a serious debt crisis.

But Japan didn’t.

Why?

Because for roughly three decades, borrowing money in Japan was essentially free.

After Japan’s massive asset bubble burst in the early 1990s, the country entered a period of prolonged deflation.

Prices barely rose.

Wages barely rose.

And the Bank of Japan responded by pushing interest rates toward zero — and keeping them there for decades.

That made Japan fundamentally different from almost every other major economy.

But there was another reason Japan could sustain so much debt.

Japan mostly owed the money to itself.

The Bank of Japan owns roughly half of Japanese government bonds, while Japanese banks, insurers and other domestic institutions own much of the rest.

Foreign investors own less than 8%.

So Japan wasn't dependent on foreign creditors the way countries like Greece or Argentina were.

Instead, Japan effectively built an enormous financial system around extremely cheap domestic money.

And eventually, that cheap money spread across the entire world.

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The Yen Carry Trade

Here's where this becomes a global story.

Imagine you're an investor.

Japan lets you borrow yen at almost 0%.

You convert those yen into U.S. dollars.

Then you buy something yielding 4–5%.

Or technology stocks.

Or bonds.

Or Bitcoin.

Or almost anything else that can generate a higher return than the cost of borrowing.

You make the difference.

This became known as the yen carry trade.

And it grew into a global financial machine worth trillions of dollars.

But Japan wasn't only lending money to the world.

Japanese institutions were also investing their own enormous savings overseas.

Japanese pension funds, insurance companies, banks and households moved money into foreign assets because there simply wasn't much return available at home.

Japan became one of the world's largest holders of U.S. government debt.

The result was a strange relationship:

Japan's cheap money helped finance the rest of the world.

U.S. bonds benefited.

Global stocks benefited.

Risk assets benefited.

And investors everywhere became accustomed to a world where Japanese money was cheap and abundant.

But that system depended on one thing:

Japanese interest rates staying near zero.

They aren't anymore.

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Then Inflation Changed Everything

For decades, Japan couldn't generate meaningful inflation.

Then the pandemic changed the global economy.

Supply chains broke.

Energy prices surged.

Governments injected enormous amounts of money into their economies.

And eventually, inflation reached Japan.

By 2022, Japan was experiencing inflation levels it hadn't seen in decades.

The Bank of Japan initially refused to aggressively raise rates.

That created a problem.

The United States and other developed economies were paying much higher interest rates while Japan was still offering almost nothing.

Money naturally flowed out of yen and into higher-yielding currencies like the U.S. dollar.

The yen weakened dramatically.

It moved from around ¥110 per dollar toward ¥150 and eventually around ¥160.

That matters enormously for Japan because the country imports much of its energy.

Oil and other commodities are priced in dollars.

So when the yen gets weaker, everything Japan imports becomes more expensive.

That creates more inflation.

Which puts even more pressure on the Bank of Japan.

Japan was caught in a vicious cycle.

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Japan Has Two Choices

Japan is now facing a problem that didn't really exist during its deflationary decades.

It has to choose between protecting its currency and protecting its bond market.

Option 1: Keep Rates Low

Japan could keep interest rates extremely low.

That would make its enormous government debt easier to manage.

But the yen could continue weakening.

Imported goods become more expensive.

Inflation eats into household savings.

And Japanese consumers gradually lose purchasing power.

Option 2: Raise Rates

Japan could raise interest rates to support the yen.

But now that enormous government debt suddenly has to pay real interest.

A country with debt above 200% of GDP cannot casually increase its borrowing costs.

And the Bank of Japan itself owns a huge portion of those bonds.

Higher rates therefore create enormous pressure on Japan's financial system.

There isn't really a painless third option.

Japan has to choose which part of the system it wants to protect.

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And Both Markets Are Starting to Break

The yen has fallen to levels around ¥160 per dollar — roughly the weakest it has been against the dollar in decades.

At the same time, Japanese government bond yields have surged.

Japan's 10-year government bond yield was around 0.25% in 2022.

Now it's around 2.7%.

Its 30-year bond has climbed toward 4%.

Those numbers might not sound enormous compared with U.S. rates.

But remember:

Japan has more than 200% debt-to-GDP.

When you apply higher interest rates to that much debt, even a small increase becomes extremely expensive.

And something even stranger is happening.

Japanese inflation has recently been below the Bank of Japan's 2% target.

Normally, that should be good news for bonds.

But Japanese bond yields are still rising.

That tells us the market isn't only worried about inflation anymore.

It's asking a much scarier question:

Who is going to buy all this Japanese debt?

The Bank of Japan wants to reduce its bond purchases.

The government wants to spend more.

Investors are demanding higher yields to compensate for the risk.

Japan's bond market is waking up after decades of being artificially suppressed.

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Japan Is Fighting the Yen — And Losing

Japan has already spent around $73 billion trying to support the yen.

The currency strengthened temporarily.

Then it weakened again.

The Bank of Japan also raised rates.

The yen still fell.

One economist described it like trying to tap the brakes while keeping your other foot on the accelerator.

Japan can spend billions buying its own currency.

But it can't permanently defeat the underlying economics.

If investors can earn substantially more by holding dollars than yen, capital naturally wants to leave Japan.

So Japan is beginning to pursue another strategy.

Instead of constantly buying yen...

it wants Japanese money to come home.

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The Great Repatriation

There's a word for money returning to its home country:

Repatriation.

And this could be the most important part of the entire story.

For the first time in decades, Japanese government bonds actually offer a meaningful return.

A Japanese pension fund can now look at a Japanese government bond and say:

Why should I take currency risk buying a U.S. bond when I can earn a reasonable yield at home in yen?

That changes the equation completely.

And Japanese institutions are already beginning to respond.

Japan's enormous Government Pension Investment Fund — the GPIF — manages roughly $1.8 trillion.

It also owns hundreds of billions of dollars of foreign assets, including a huge amount of U.S. Treasury bonds and American stocks.

If Japanese institutions begin shifting money from foreign assets back into Japan, they have to sell those foreign assets.

They receive dollars.

They convert those dollars into yen.

That creates demand for yen.

And suddenly Japan doesn't need to spend billions endlessly buying its own currency.

Japanese institutions are doing it for them.

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And That's Where This Becomes a U.S. Problem

For decades, Japan has been one of the most important foreign buyers of U.S. government debt.

But imagine what happens if Japan stops buying.

Or worse:

starts selling.

The U.S. Treasury needs buyers to finance America's enormous government borrowing.

If one of the world's largest buyers steps back, other investors need to be convinced to take its place.

How do you convince them?

Offer them a higher interest rate.

That means higher Treasury yields.

And Treasury yields don't just affect governments.

They influence the cost of mortgages, corporate borrowing, consumer loans and almost every other form of credit.

The U.S. 10-year Treasury is one of the most important interest rates in the entire global economy.

So even if you don't own a single Japanese stock or bond...

Japan can still affect the interest rate on your mortgage.

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But There's Something Even Bigger: The Carry Trade

Remember those trillions of dollars borrowed in cheap yen?

That money is still out there.

And if Japanese rates rise while the yen strengthens, the economics of the trade start reversing.

Imagine borrowing ¥1 billion when the yen is weak.

You convert it into dollars and invest overseas.

Then suddenly the yen strengthens.

You now need more dollars to buy back the yen you originally borrowed.

Your borrowing costs are rising at the same time.

So you sell your foreign investments.

Buy yen.

Repay the Japanese loan.

And millions of investors doing this simultaneously can create a massive wave of forced selling.

That's why the yen is more than just a currency.

It's a gauge of global leverage.

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We've Seen This Movie Before

Look at what happened historically when the yen suddenly strengthened.

In 1998, the yen surged as the Long-Term Capital Management crisis unfolded.

In 2008, the yen strengthened during the global financial crisis as carry trades unwound.

In 2011, the yen surged during another period of extreme global fear.

In 2020, the yen strengthened during the COVID market crash.

And in August 2024, the Bank of Japan raised rates slightly.

The yen strengthened.

Japanese stocks suffered one of their worst days in decades.

The U.S. stock market also fell sharply.

Millions of American investors wondered what had suddenly happened.

The answer wasn't necessarily something happening in America.

It was happening in Japan.

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The Difference This Time

There's an important distinction.

Historically, the yen strengthened because something else was going wrong.

A crisis would happen.

Investors would unwind their carry trades.

They would buy back yen.

And the yen would rise.

This time, Japan actually wants the yen to strengthen.

That's the difference.

Japan is deliberately trying to change the flow of global capital.

Higher interest rates.

Less bond buying.

Repatriation of Japanese wealth.

More domestic investment.

And potentially new financial incentives designed to encourage capital to return home.

If this works, Japan could absorb a huge amount of money that has spent decades flowing into foreign markets.

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What About Article 589?

This is where the story becomes much more speculative.

A viral anonymous Japanese account has repeatedly posted cryptic warnings about Japan's financial policy.

One of its most discussed claims referenced Article 589, suggesting it could eventually be used to give Japan greater control over how money lent abroad is handled.

But there is an important caveat:

There is no confirmed policy showing that Article 589 will be used this way.

The account is anonymous.

There has been no official announcement confirming the theory.

So this part should be treated as speculation, not established policy.

The broader capital-repatriation story, however, doesn't depend on Article 589.

Japan already has a powerful incentive to bring money home.

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Japan Is Also Embracing Crypto — For a Different Reason

Japan has also been moving toward a more regulated crypto framework.

At first glance, that might seem unrelated.

But there's a potential financial logic behind it.

If Japanese crypto wealth is sitting offshore, Japan has an incentive to bring that capital back into its own financial system.

Lower taxes and regulated domestic exchanges can make it more attractive for Japanese investors to hold digital assets inside Japan.

And stablecoins introduce another interesting possibility.

Stablecoins can be backed by government bonds.

The U.S. has already demonstrated how stablecoin issuers can become significant buyers of Treasury debt.

Japan could potentially build a similar system around Japanese government bonds.

In other words, crypto doesn't necessarily have to be about speculation.

It can also become another mechanism through which Japan attracts capital back into its own financial system — and potentially creates additional demand for its debt.

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So What Happens If the Yen Actually Strengthens?

This is the part investors should pay attention to.

A stronger yen doesn't automatically cause a market crash.

But historically, rapid yen appreciation has often happened alongside periods when global leverage was being unwound.

That's because the same mechanism is operating underneath everything:

Borrow cheap yen → Invest elsewhere → Yen strengthens → Trade becomes less profitable → Sell foreign assets → Buy yen.

The yen strengthens even more.

More investors unwind.

More assets get sold.

It becomes a feedback loop.

That's exactly why Japan's monetary policy matters far beyond Japan.

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The Global Money Machine Is Changing

For 30 years, Japan effectively supplied the world with cheap capital.

Borrow yen. Buy dollars. Buy bonds. Buy stocks. Buy risk. Repeat.

That system helped create an enormous amount of global leverage.

But Japan can no longer maintain the exact same system while simultaneously protecting its currency and its domestic purchasing power.

Something has to change.

And right now, the direction of travel is becoming increasingly clear:

Japanese money wants to go home.

If Japanese pension funds, banks and insurance companies increasingly prefer domestic bonds over U.S. Treasuries, the world's largest financial markets will feel it.

If the yen strengthens, carry trades become less attractive.

If carry trades unwind, global assets can come under pressure.

And if U.S. Treasury demand falls, American borrowing costs could rise.

This is why Japan's currency isn't just a Japanese problem.

It's a global liquidity problem.

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The Bigger Picture

Japan spent decades creating the world's cheapest money.

The rest of the world got used to it.

Now Japan is slowly taking that money away.

Nobody knows exactly how quickly this will happen.

Nobody knows whether the yen will actually strengthen dramatically.

And nobody knows whether Japan can successfully normalize its economy without creating a much larger financial crisis.

But the direction matters.

Because for decades, the global financial system had one enormous assumption built into it:

Japanese money would remain cheap forever.

That assumption is no longer safe.

And if Japan's money really does come home, the question isn't simply what happens to Japan.

It's:

Who Has Been Depending on That Money Staying Overseas?

Because the answer is...

Almost everyone.