The Japanese Crisis: How Tokyo Reached a Point that Threatens the Global Financial System?
Introduction
For more than 30 years, the Japanese economy has relied on a unique monetary policy: near-zero interest rates, massive bond purchases, and a deliberate weakening of the yen. This policy created long-term stability, but at the same time, it built a massive mountain of debt on the Japanese government and made global markets heavily dependent on cheap yen financing.
Today, with yields on Japanese bonds rising to levels not seen since 1999, the world has started asking a frightening question:
Has Japan reached the breaking point? Does this really threaten the global financial system?
---
First: What exactly happened in Japan?
1. A shocking rise in bond yields (JGB)
Japanese government bonds with a 30-year term reached 3.41% — the highest level in decades.
A slight rise in other countries may seem ordinary, but for Japan it is an earthquake because:
Japan is burdened with debt of about 230% of GDP.
Every small rise in interest means billions more that the government has to pay annually.
The Japanese financial system is fundamentally built on very low yields.
This shift is sudden and dangerous.
2. Inflation is out of control
Core inflation in Japan reached 3% — much higher than the Bank of Japan's target (2%).
And this puts the central bank in an impossible dilemma:
The first option: raising interest rates
Strengthens the yen
Raises debt servicing costs
Could cause an internal financial collapse at the government and banks
The second option: keep interest rates low
Maintains state debts
But it allows inflation to eat away at the people's savings
And further weakens the yen
Both options are bad… and Japan has been trying to escape them for years.
3. Historical yen weakness
The yen reached levels of 157 against the dollar.
This weakness has huge implications:
Imports become more expensive
Inflation is rising
Investors who borrow in yen enter a cycle of serious losses when the yen moves inversely
---
Second: Where is the global danger? The 'Carry Trade'
For 30 years, investors around the world have used a risky yet profitable strategy:
Borrowing in yen (very cheap) then investing in currencies or assets with higher yields.
The result of this:
Funds
Global banks
Companies
And even governments
… everything has become dependent on 'cheap Japanese money'.
Estimates say the size of this strategy ranges between:
350 billion to 4 trillion dollars.
The real figure is unknown… because it is hidden within derivative contracts.
And this makes the situation more ambiguous and dangerous.
What if the yen suddenly rises by just 3–5 points?
Funding positions become unprofitable
Funds are forced to liquidate their positions quickly
A massive sell-off occurs in global markets
Volatility rises in a violent manner
And we saw a miniature model of this in the summer of 2024 when:
Nikkei fell 12% in one day
NASDAQ fell 13% in the same session
And that was just a 'warning'… but today the numbers are much larger.
---
Third: Why might the Japanese economy collapse internally?
1. Cost of debt servicing
Japan has about 9 trillion dollars in debt.
Every 0.5% increase in interest = an increase of 45 billion dollars in annual interest payments.
If debt servicing exceeds 10% of tax revenues, Japan enters what is called:
“Financial Death Spiral” (Debt Spiral)
The government borrows to cover its debt interest
Borrowing increases debt
Debt raises interest rates
Interest rates rise, increasing debt further
And so…
2. The need to increase military spending
Rising tensions with China over the Senkaku Islands led the Japanese government to announce:
Increasing defense spending to 2% of GDP
About 9 trillion yen annually
And this increases pressure on an already strained budget.
---
Fourth: What awaits the world?
1. Emerging markets
Currencies like:
Turkish lira
South African rand
Peso
Asian currencies
Could drop 10–15% if there is a large-scale unwinding of the carry trade.
2. US stock markets
If the situation really explodes:
NASDAQ could fall 12–20%
Global liquidity will decline
Highly valued tech stocks will be harmed the most
Mortgage and auto loan interest rates will rise
3. The end of the 'cheap money' era
Since 1990, Japan has been considered the 'secret reservoir' of global liquidity.
Now, this reservoir is drying up.
The global financial system will completely change to:
Permanently higher yields
Financing is becoming harder
Lower valuations for stocks
Global economic slowdown
Increased bankruptcy risks
---
Fifth: Is the world really on the brink of collapse?
What is true?
✔ Yields have risen to dangerous levels
✔ Japanese debt is massive and unsustainable
✔ The yen is at its weakest levels
✔ The carry trade could turn against the world
✔ Inflation is rising
✔ The Bank of Japan is trapped with no real options
What is inflated?
✖ The financial system did not collapse today
✖ There is no final earthquake or declaration of complete collapse now
✖ The figures related to the size of the carry trade are not accurate
✖ Some dollar accounts are inflated and not official
The truth is that Japan has entered a stage of global danger, but a complete collapse is not certain — it has just become very close if global authorities do not intervene wisely.
---
Sixth: What should the smart investor do now?
1. Avoid high-risk exposure
Reduce or eliminate high leverage positions.
2. Currency diversification
Do not rely on a single currency, especially weak currencies.
3. Add a portion of the portfolio to safe assets
Like:
Short-term US bonds
Gold
Respectable liquidity ratio
4. Monitor the Bank of Japan's decision on December 18–19
This will be the most important meeting of 2025 and perhaps the most important meeting since 1990.
5. Monitor yen movements
Any rapid rise in the yen could mean the beginning of a dangerous unwinding wave.
---
The summary
Japan today faces the most dangerous financial crisis in its modern history.
Rising bond yields, high inflation, massive debt, weak yen, and carry trade risks make the Japanese economy a 'ticking time bomb' in the global financial system.
Will the world collapse?
Not today… but the danger is very real, and the shock could appear at any moment if the yen moves or Tokyo raises interest rates.
This is a rare event that could mark a turning point in the global economy, just like 2008… and perhaps worse.
