The Bank of Japan (BoJ) is caught in a dilemma. While it has been hiking interest rates, pushing up long-term Japanese government bond yields, the yen has paradoxically fallen to a 20-year low.
The core reason for this contradiction is Japan's "monstrous level of government debt." The analysis points out that the current yields, though rising, are still artificially low because the BoJ remains a massive buyer of government bonds. As a result, the market's required risk premium for holding Japanese debt—due to its unsustainable fiscal path—isn't reflected in the bond market. Instead, this risk is expressed through a continuing sell-off of the yen.
The conclusion is that the yen's depreciation will not stop until yields are allowed to rise much more significantly. This would force the Japanese government to pursue fiscal consolidation and address its debt burden.
