The Japanese debt monster begins to show the teeth

Something is moving in Japan. And no, this time is not Godzilla, the iconic dinosaur of Japanese culture, although what emerges also has equally large proportions: The problem of public debt. After a long dream, this monster begins to stir and threatens to unleash an economic crisis at the global level.

And like every monster that awakens after deep lethargy, he began to show his teeth. But to understand the magnitude of this threat, it is worth reviewing some numbers. Japan is the third country with the greatest indebtedness globally, only surpassed by the United States and China. Currently, his government drags a liability that exceeds 7.8 billion dollars (Trillions in English).

The alerts lit on May 20, when the Japanese authorities tried to place bonds at 20 years, but the demand was extremely low, marking The lowest level since 2012. “Rarely a single bond auction has said so much about the fragile state of the global financial system and the one that Tokyo celebrated on May 20. As the sale of Japanese government bonds at 20 years failed, many felt a moment of canary in the coal mine for global markets,” said analysts of the analysts of the Financial Blog Zero Hedge.

The Canarian metaphor in the coal mine refers to a danger signal for markets. Like the miners use this type of bird to detect toxic gases before they can perceive them, the rise in the interest rate is a warning about the financial problems that could affect Japan and the world.

Because this alert reflects the distrust of investors in the ability of the Japan government to handle the debt monster. In addition, when the demand for long -term bonds falls, It is more difficult to finance public obligations without raising interest rates. In these contexts, the State is forced to offer greater yields to attract buyers, which increases the cost of indebtedness.

And there arises the great risk: because as the Bank of Japan (BOJ) continues to raise the interest rate, many investors could choose to bring their money back home, abandoning active abroad, such as the United States Treasury bonds.

In fact, the yields of Japanese long -term bonds, such as those of 30 and 40 years, have begun to rise, indicating that investors are demanding greater interest rates due to the perception of a higher risk associated with debt.

In this regard, Albert Edwards, financial market analyst, says: “If the highest yields of the Japanese bank attract Japanese investors to return home, the reversal of the Carry Trade It could cause a strong suction sound in US financial assets. Therefore, I would consider trying to understand and follow the growing long end of the Japanese market as the most important thing for investors at this time. ”

As cryptootics reported, the Carry Trade (Sometimes translated into Spanish as a “financial bicycle”) is a strategy in which investors borrow in local currency (in this case, in yen), taking advantage of their historically low rates, to invest in assets that generate greater yields in other countries. Now, what happens if the incentive to maintain this position disappears? Capital exits in the United States and other countries will be generated, which could cause serious bonds and shares. For that reason, the Japanese debt monster can expand its turbulence in the rest of the world.

After 20 years keeping interest rates at extremely low levels – even negative – the BOJ faces a major challenge. Is that inflation, which for decades remained under control, began to accelerate and already exceeds the 2% target set by the entity. A key macroeconomic fact is that the underlying inflation reached 3.5%, its highest level in more than two years, which increases the pressure on the central bank to continue with the hardening of its monetary policy.

The following graph shows how inflation in Japan (celestial and blue lines) has evolved, from 2021 to date, in relation to the 2% objective (red dotted line). Gray lines represent that goods goods (Goods) and services (Services) They have been more volatile.

As a consequence of the acceleration of inflation, since 2022, the BOJ changed its monetary policy and began with a standardization process that implies raising rates and reducing their bond purchases. The mechanism known as «quantitative tightening»(Quantitative hardening, in Spanish) represents a challenge for a country that for years depended on cheap money to support its growth and finance its gigantic public debt.

By reducing the demand for the BOJ in the bond market, long -term yields have begun to rise, increasing the cost for the status of obtaining financing.

Here it is important to stop because the fact that the BOJ is the main buyer of government bonds has maintained artificially low yields for yearsallowing the Asian State to finance its enormous debt at a relatively low cost. In addition, it leaves the market without a reliable buyer to sustain demand.

The following graph shows that the BOJ is by broad margin the largest public debt holder in the country, with 52% of the total government bonds in circulation. Below are: life insurers (Life Insurers), Banks (Banks), pension funds (pension Funds), others (Others), foreigners (Foreigners), investment trusts (Investment Trusts), households (Households) and other financial institutions (other Financials).

The increase in yields forces the Japanese government to pay higher interests for their debt, which puts even more pressure on public finances already quite fragile. This situation not only generates concern within the country, but also arouses alert in worldwide financial markets. Therefore, investors must closely follow each movement of this “monster” that threatens to destabilize the global economy.

How to face the monster?

The answer to this question is simple and direct: with Bitcoin (BTC). Although digital currency can suffer the volatility of economic turbulence, it is an opportunity to show its strength as an asset of refuge, as well as gold.

The following graph shows that while Japanese 30 -year -old bonds (blue line) suffer a pressure for low demand, currency price created by Satoshi Nakamoto (yellow line) has experienced a price increase.

This shows that BTC begins to become independent of traditional financial instruments and reflects that investors are opting for decentralized and non -sovereign assets. That is, in the face of the uncertainty generated by the economic situation in Japan, which can be transferred to other markets, BTC emerges as an alternative that can benefit investors in the medium and long term.

The underlying problem in Japan is that, if the confidence in its debt continues to deteriorate, the Government will have no choice but to finance with monetary issuance. That is, print money to cover your tax commitments.

Although this type of measure can be a solution to the fiscal problem in the short term, a liquidity injection could accelerate the loss of confidence in the YEN, especially in an inflationary environment. In this scenario, with more money in circulation without real support, Investors will seek refuge in a scarce asset like BTC. The more liquidity is injected into the global system, the more BTC benefits.

Before a monetary expansion, excess money seeks limited assets, which ends up promoting the price of BTC. And to reinforce this argument, it is worth remembering that Blackrock, the world’s largest asset manager, defined BTC as a “unique diversifying asset.”

“The unique characteristics of BTC can make it a coverage against risks that traditional assets cannot address, particularly in times of greater geopolitical and economic uncertainty.”

Blackrock, investment company.

It is important to highlight that BTC does not depend on the decisions of governments or central banks. In addition, unlike Fíat money, the BTC issuance is set to 21 million units, which makes it a more resistant reserve of value against inflation and economic uncertainty. That inherent shortage is what is attracting the interest of governments and companies. It is a factor that influences its medium and long term price.

Thus, while the Japanese debt monster roars and generates uncertainty in global markets, Bitcoin gains ground and consolidates itself as a protective shield in the face of the crisis that is coming.

Discharge of responsibility: The views and opinions expressed in this article belong to its author and do not necessarily reflect those of cryptootics. The author’s opinion is informatively and under no circumstances constitutes an investment recommendation or financial advice.