In Q1 2025, Japan’s economy contracted. The country’s three major automakers posted disappointing quarterly earnings and issued cautious outlooks. Persistently high rice prices have exacerbated the cost of living for consumers, while retailers struggle to offer goods at affordable prices. Government efforts to address these issues have had limited effect.
Why Japan’s Economy Matters to the World
Japan, despite accounting for only 2% of the global population, can have outsized influence on the world economy. As the third-largest economy globally and one of the largest creditor nations, Japan holds over $3 trillion in net foreign assets—including more than $1 trillion in U.S. Treasury bonds. Its longstanding low interest rate policy and weak yen have long supported global financial markets through what’s known as the “yen carry trade.”
- Yen Carry Trade
Investors borrow yen at near-zero interest rates and convert it into higher-yielding currencies like the U.S. dollar or euro, then invest in assets such as U.S. equities, emerging market bonds, cryptocurrencies, or real estate to earn a spread. This trade, worth hundreds of billions of dollars, has been dubbed a “global monetary loophole.” - Global Implications
The outflow of Japanese capital has helped suppress interest rates in the U.S. and elsewhere, supporting asset prices and the financing of government deficits.
A Crisis in Slow Motion
In 2024, things began to shift. The Bank of Japan raised interest rates for the first time in decades, causing the yen to appreciate more than 10% in a matter of weeks. As a result, carry trades began to unwind. Japanese equities plunged, and the ripple effect hit U.S. stock markets and assets like Bitcoin. JPMorgan warned that the unwind was only halfway through.
In 2025, the crisis has intensified:
- Bond Market Turbulence
The yield on Japan’s 30-year government bonds has risen to 3%, while the 40-year yield hit a record 3.6%. Bond auctions are failing, and investor confidence in Japanese government bonds is eroding, prompting demands for higher yields. - Debt Burden
Japan’s debt-to-GDP ratio exceeds 260%—the highest among developed nations. While the central bank had supported low yields through large-scale bond purchases, it is now gradually stepping back, prompting the market to reassess the true value of Japanese debt. - Yen Appreciation
A stronger yen makes carry trades unprofitable, forcing investors to liquidate overseas assets to cover losses—fueling further volatility in global markets.
Demographic Headwinds
Japan is the most rapidly aging society in the world, with 30% of its population over age 65 and a birthrate far below replacement level. Since 2008, Japan’s population has been in steady decline and is expected to shrink by about 20 million by 2050—the equivalent of Florida’s entire population.
Aging demographics have led to:
- A shrinking labor force and slower economic growth
- Declining tax revenues
- Increasing pension and healthcare costs, putting greater pressure on public finances
To sustain its economy, Japan has relied heavily on debt—enabled by ultra-low interest rates. But as rates rise, debt-servicing costs are climbing rapidly.
Global Implications
- U.S. Treasury Market
As the largest foreign holder of U.S. Treasuries, Japan could reduce or halt its purchases amid rising domestic interest rates and a stronger yen. This would increase U.S. borrowing costs, potentially pushing up interest rates and creating market turbulence. - Global Financial Markets
The unwinding of yen carry trades could trigger the liquidation of trillions of dollars in global leveraged positions—affecting assets ranging from U.S. stocks to cryptocurrencies. - Currency Depreciation Trend
With high global debt levels and widespread demographic challenges, economist Lyn Alden has noted that currency depreciation may be the only viable path forward. This has pushed investors toward decentralized, non-inflationary assets like Bitcoin.
Japan’s Dilemma
Japan now faces a lose-lose choice:
- Raising interest rates to combat inflation and support the yen would sharply increase debt-servicing costs (a 1% rise would add roughly $85 billion in annual interest payments—more than Japan’s defense budget).
- Maintaining low rates would allow further borrowing but risk yen depreciation, which would drive up import costs and deepen the cost-of-living crisis.
The Bank of Japan now holds over 50% of the nation’s bond market. While it has historically maintained system stability by printing money, the recent failure of bond auctions suggests that market confidence is waning.
As trust in Japan’s bonds and central banking system erodes, some capital is shifting to decentralized assets like Bitcoin. For example, Japan-listed firm Metaplanet, which holds a large volume of Bitcoin, has seen its share price surge as investors increasingly view it as a hedge against potential collapse in the bond market. This trend highlights growing market concern over the sustainability of traditional financial systems.
Conclusion
Japan’s economic problems are not just a domestic crisis—they serve as a warning signal to the global financial system. The collapse of yen carry trades, instability in bond markets, and demographic headwinds collectively mark the end of an era defined by low interest rates and debt expansion. Global markets may now face a future of higher interest rates, heightened volatility, and mounting pressure on fiat currencies. As a result, investors are increasingly turning to hard assets like Bitcoin to hedge against rising systemic risk.