Japan Faces Debt Crisis Amid High Inflation and Rising Bond Yields

An analysis by economist Robin Brooks highlights Japan's precarious economic situation amid its towering debt levels. Japan's public debt-to-GDP ratio stands at around 240%, the highest among advanced economies, and inflation has soared since mid-2022.

Japan's government faces a dilemma: maintaining low interest rates risks yen depreciation and uncontrolled inflation, while raising yields threatens debt sustainability.
The potential for a debt crisis looms as investors demand higher premiums on Japanese bonds due to fiscal risks.
A U.S. recession may temporarily relieve Japan by lowering global bond yields, offering a window of respite.
Brooks suggests that sustainable solutions involve cutting spending or raising taxes, but public acceptance remains uncertain.

Additionally, the yen has depreciated by 41% since 2021, contributing to inflation, while yen-pegged stablecoins like those proposed by JPYC could serve as alternative financial tools.

The evolving situation underscores the delicate balance Japan must maintain in navigating its economic challenges.