Japan’s Nikkei 225 stock index hit another all-time high on Wednesday, up 6.5% since the start of the year and up 76.5% from the April 2025 low that followed US President Donald Trump’s “Liberation Day” tariff announcement. So why, then, has one of America’s most highly regarded economists declared that Japan is in crisis?
Robin Brooks is a senior fellow in the Global Economy and Development program at the Brookings Institution think tank, former chief economist at the Institute of International Finance and a former chief foreign exchange strategist at Goldman Sachs.
Before joining the private sector, he spent eight years as an economist at the International Monetary Fund. In a piece published on Substack under the headline “Japan in Crisis”, Brooks wrote:
Against the US dollar, the Japanese yen is closing in on the lows it reached in 2024… It’s tempting to think that official intervention will stop this slide… 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.
For reference, the yen-dollar exchange rate was ¥159/$ on January 14, 2026, vs a previous low of ¥161 in June 2024. In between, the currency strengthened to ¥141 in September 2024, dropped to ¥157 in December 2024 and strengthened again to ¥142 in April 2025. So far, this looks more like a trading range than a sustained weakening trend.
However, just over six years ago, in December 2020, the rate was ¥103. Since then, the yen has depreciated by 54%, helping Japanese exporters compete with cheaper Chinese products but also contributing significantly to the inflation that is now the primary concern of Japanese voters.
In March 2024, the Bank of Japan (BOJ) raised its policy rate, the overnight call rate, from -0.1% to a target range of 0% to 0.1%, ending the negative interest rate policy introduced eight years earlier. The rate was then raised to 0.25% in July 2024, to 0.5% in January 2025 and to 0.75% in December 2025 – the highest level in 30 years.
But the market wants more. The yield on the 10-year Japanese government bond (JGB) is now 2.2%, while the yield on the 30-year bond is 3.5%.
Brooks calls the 30-year bond rate “the crux of the problem,” concluding that “Japan’s yields have been rising quickly, but they’re still much too low relative to its monstrous level of government debt… Ongoing purchases of government debt by the Bank of Japan are preventing yields from rising to the level markets want to see.”
But are they? Five years ago, the yield on Japan’s 30-year bond was 0.65%. A year ago, it was 2.3%. At that pace, it could approach 5% within a year. The yield on the US 30-year Treasury bond is currently 4.8%.
The BOJ holds just over half of Japanese government bonds outstanding —meaning the government owes that money largely to itself. Gross government debt stands at 227% of GDP, according to the International Monetary Fund, implying net debt of roughly 110%.
Foreign ownership of Japanese government bonds is about 12%, compared with 30% to 35% for the US, 25% to 30% for the UK and 50% to 55% for Germany. Foreign investors account for nearly two-thirds of trading, according to the Japan Securities Dealers Association, but domestic holdings — about 75% of which are held by the BOJ, commercial banks and insurance companies — remain stable. The risk of default appears very low.
Adding nuance to his argument, Brooks writes:
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. …
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.”
In another Substack post, Brooks details the Japanese government’s large financial asset holdings, totaling more than 100% of GDP. These include US Treasury bonds, euros and gold held by the Ministry of Finance; social security and pension funds; and shares in Japan Post Bank and Norinchukin, the Central Credit Union for Agriculture and Forestry.
“Much of this is illiquid and can’t be sold at short notice,” notes Brooks, “But even a gesture in this direction will make a big difference for the yen.” That is perhaps true, but it would be very difficult politically and is not on the agenda.
Japan is the largest foreign holder of US Treasury bonds, at about $1.2 trillion, and has been buying more as China sells. Wise or not, reversing that stance could have political repercussions.
English economist Richard Jerram, a former chief economist at the Bank of Singapore and at Macquarie Capital Securities in Japan, recently wrote on LinkedIn:
“I’m seeing so many scare stories about Japanese government debt at the moment – another in the FT today. For decent analysis, I’d love to see three points addressed – two are easy, one is hard:
- “Talk about net debt, not gross. Japan is still high, but not much of an outlier. Lower than the US, not much above UK or France.”
- “Discuss the average maturity of government debt – just under ten years, so the impact of higher bond yields is very slow to come through.”
- “(The hard one.) Explain why net interest payments as a share of GDP in 2024 were ZERO according to the OECD and, with that in mind, why debt levels are a problem.”
Net interest payments were zero because of the financial assets Brooks outlines. Interest coverage, moreover, matters more than debt-to-GDP ratios.
But net interest payments are rising and BOJ governor Kazuo Ueda is aware of the risk. At the end of December, he warned that postponing a rate hike could create a “major negative for the economy and financial system,” adding that “if we mistake the timing of a rate hike, or are too late, there is often the possibility of being forced into an extremely large rate hike later.”
Ueda must also consider the negative impact of US tariffs on Japanese business and the growth-oriented economic policy of Prime Minister Sanae Takaichi, who called BOJ rate hikes “stupid” before taking office.
She now advocates “responsible and proactive public finances,” arguing, as reported by The Mainichi, that “focusing on increases in long-term interest rates is less important than promoting economic growth.”
The BOJ is nominally independent, but it is hard to believe that the prime minister and Cabinet have no influence on Ueda’s thinking. When the heads of 10 central banks signed a statement supporting Federal Reserve Chair Jerome Powell on January 11, Ueda was not among them. The statement, issued by the European Central Bank on January 13, noted that “other central banks may be added to the list of signatories later on.”
Japan’s Chief Cabinet Secretary Minoru Kihara told reporters that, “the matter concerns the BOJ’s own judgment, so the government will refrain from commenting,” while adding “as stipulated by law that monetary policy is part of overall economic policy, the BOJ is required to maintain close coordination and sufficient communication with the government.
“That said,” he added, “specific methods of monetary policy should be entrusted to the BOJ.”
Takaichi’s budget proposal for next fiscal year, which begins in April, includes record-high general account spending, prompting The Asahi Shimbun to write that it “ignores [the] sense of crisis in public finances.”
The left-leaning daily noted that “The overall amount swelled because price increases were reflected across expense categories… and higher interest rates were factored in. The prime minister also prioritized growth investments and defense spending.”
This, combined with reports that Takaichi was planning to call a snap election, contributed to the yen’s depreciation — a development that Finance Minister Satsuki Katayama found alarming.
She and US Treasury Secretary Scott Bessent reportedly shared their concern about the situation. Then, on Wednesday (January 14), Japanese media reported that Takaichi had decided to dissolve the Lower House early in the next Diet session, scheduled to open on January 23.
Opposition parties criticized the decision to call an election before passage of the budget, but Takaichi is riding high in the polls and the ruling Liberal Democratic Party (LDP) wants to capitalize on that momentum.
This prompted The Mainichi to write that “the government of Prime Minister Sanae Takaichi has repeatedly claimed that the well-being of the people is its top priority, yet its actions tell a different story, appearing to be nothing more than a power play to maintain control.”
Nicholas Smith, CLSA’s Japan investment strategist, notes that while Takaichi’s approval rating is sky-high at 75%, support for the LDP is only 37%. “So that’s a risk. If she loses seats, she’s toast.”
Because the LDP lacks a majority in the Diet, political instability would likely follow a poor election result and the yen could test new lows.
Compared with developments in the US and Europe, this hardly qualifies as a crisis. But instability in East Asia’s second-largest economy and America’s largest regional ally would still be a significant problem and risk.
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