Japan Just Triggered America’s Debt Crisis — Bond Market Panic Spreads

Added: 2026-05-22

[00:00:00]Welcome back everyone. Thank you so much for joining me. Thank you for being here. Before we begin, I would like to mention something very important.

[00:00:08]Recently, YouTube has shadowbanned this channel. Views have dropped dramatically as many of you have noticed and was even more concerning. Many of you shared in the comments that you had been unsubscribed without you even knowing. And I can certainly see that as well. Some days the channel loses a couple hundred subscribers at a time which never happened before and uh I know for a fact that I don't really say anything to upset a large number of people at a time to make them want to leave. So hopefully this channel does not get taken down altogether but um as we all know nothing is guaranteed. But that is what I will be preparing for in any case. Um, by shifting my focus towards Substack and Patreon. I use both platforms interchangeably. I think they're great.

[00:01:00]They're similar in many different ways.

[00:01:02]You will already find exclusive articles there. You will find ad free videos, ad free interviews uh for my subscribers and soon you will see live Q&A and other ways to get engaged and involved. So I will drop the links to my substack and patreon below. And uh I do hope to see many of you if not all of you join those two platforms so that we have a way to stay in touch to stay connected if there is a purge on YouTube. All right. Now let's get into the topic of today's video. As a prominent American economist, Michael Hudson mentioned in our recent interview, the global financial system has traditionally operated on one major assumption. And what is that assumption? Well, the assumption was there would always be strong demand for US government debt.

[00:01:55]The United States could run enormous deficits. It could issue massive amounts of Treasury bonds and investors around the world would still continue buying them. But now there are growing signs that one of the most important foreign buyers of US debt may begin pulling back and that buyer is Japan. Japanese investors collectively hold around $1 trillion in US treasuries, making Japan the largest foreign holder of American debt. For years, Japanese money poured into US financial markets because investors had few attractive options at home. They didn't really have that many alternatives. Japanese government bonds offered extremely low returns for decades. And in some cases, interest rates in Japan were even negative. So that pushed Japanese pension funds, Japanese insurance companies, and large institutional investors to search overseas for better returns, for more money, especially in the United States because traditionally the US debt has been uh viewed as effectively a safe haven. Well, but now things are changing. Japan's financial system is undergoing a historic transformation.

[00:03:16]Inflation has returned to Japan after decades of stagnation and deflation, and the Bank of Japan has started raising interest rates aggressively compared to its past policies. Yields on 10-year and 30-year Japanese government bonds have surged to their highest levels since the 1990s. And this is a dramatic change for a country that spent years trapped in an ultra low rate environment. The Bank of Japan is now expected to tighten monetary policy again next month, potentially raising benchmark interest rate from 0.75% to 1%. And while those numbers may seem small by American standards, for Japan, the central bank spent years fighting weak growth and deflation with near zero and even negative interest rates as I mentioned earlier and now rising inflation and higher energy costs, thanks Trump, are forcing policy makers to move into the opposite direction. The Iran war has played a very important role in this shift because rising oil prices are increasing inflationary pressure inside Japan. Since Japan imports much of its energy, higher oil prices quickly feed into the broader economy. So they push prices up. At the same time, Prime Minister SA Takichi is increasing government spending in an effort to stimulate economic growth and to offset the economic shock that is caused by higher energy costs. More government spending combined with rising oil prices is creating additional inflationary pressure, which makes further rate hikes more likely. So as Japanese yields rise, investors are beginning to reconsider whether they still need to send money overseas. They would like to have it back home. So for years, the logic behind buying US treasuries was very simple. Why keep money in Japanese bonds paying almost nothing when US bonds offered far greater returns? But now, as you can see, Japanese government bonds are starting to offer more attractive yields while also avoiding the currency risks and geopolitical uncertainties that are associated with overseas investments.

[00:05:44]There are already signs that this shift has begun. It's not something that's going to happen in the distant future.

[00:05:50]It has already begun. March reportedly saw the largest monthly inflow ever into Japanese sovereign bond funds, suggesting that investors are increasingly bringing capital back into domestic markets. For example, Mark Dowing, who's chief investment officer at Blue Bay, told the Financial Times that newly invested money would no longer flow into US corporate bonds or US treasuries. Instead, he said the money would remain in Japan and move into domestic assets.

[00:06:25]That statement actually highlights the scale of the potential change that is taking place in global capital flows. As I'm sure all of you are well aware, foreign demand for treasuries helped the United States finance its growing deficits at relatively manageable borrowing costs. If large foreign buyers like Japan begin reducing purchases or repatriating capital back home, which they have already started doing, the Treasury Department may need to offer much higher yields to attract investors.

[00:06:58]And that is a trap. Higher yields mean higher interest servicing costs and that means less funds for government spending on social programs among other things.

[00:07:12]So that problem is already becoming visible in the bond market. Several recent Treasury auctions have shown weaker demand than expected. By the way, on my Substack and my Patreon, there is an extensive article that I recently published uh where I explain what's going on right now in the bond market and why there was a massive selloff and what to expect next. So, as a result, the Treasury Department recently sold $25 billion worth of 30-year bonds at a 5% yield for the first time since 2007.

[00:07:51]Before this period, no 30-year Treasury bond carried an interest rate above 4.75%.

[00:07:59]The shift is historically significant because it signals growing investor concern about long-term US debt about uh the US fiscal outlook and also of course growing surging national debt. What makes this even more striking is how quickly market sentiment has changed. In midFebruary, some of you might remember just before the USIsrael war against Iran escalated, demand for a 30-year Treasury auction was reportedly the strongest in history of such auctions.

[00:08:34]Only months later, however, investors became far more cautious and treasury auctions started drawing noticeably weaker demand. If you think that's a coincidence, think again. So bond investors are increasingly worried about several major risks that are happening at the same exact time. Inflation remains persistent despite efforts by the Federal Reserve to control it. And I described these reasons by the way on Supste and Patreon in greater detail. So I don't want to uh repeat myself. But the US budget deficit continues expanding rapidly as well. Geopolitical tensions are increasing uncertainty across global markets and foreign central banks which once played a stabilizing role in the treasury market have gradually reduced their participation.

[00:09:26]Now at the same time treasury bonds are now competing with a flood of corporate debt issuance. Large corporations are issuing massive amounts of bonds as well, which forces investors to choose between government debt and corporate debt. This competition for capital puts additional upward pressure on yields. If Japanese investors continue moving money back home, which I would bet that's what's going to happen, the situation could become even more difficult for the United States.

[00:10:00]Reduced foreign demand for treasuries would likely force yields even higher because uh the US Treasury would have to make its bonds more attractive. So they would have to offer better yields. So raise yields and rising yields create a dangerous feedback loop for the American financial system is a trap. As I mentioned before, higher yields increase the government's borrowing costs.

[00:10:27]interest payments on the national debt already running at roughly1 trillion dollar per year. As interest costs rise, budget deficits grow even larger. And uh in turn, larger deficits then require the Treasurer Department to issue even more debt, which can push yields higher still. So that creates a cycle that becomes increasingly difficult to control or to break. The Treasury Department recently announced that it expects to borrow even more money this quarter than previously projected because incoming government cash flow has been weaker than expected. For many analysts, this is another sign that debt issuance will continue expanding rapidly in the years ahead because obviously the US government has to have funds to finance its operations. Now, for decades, the United States benefited from the unique position of the dollar as the world's reserve currency. It still is a reserve currency, but of course, it is weakening. US treasuries were viewed as the safest financial asset in the global system, and foreign investors consistently helped finance American deficits. And anybody who tells you otherwise probably needs to uh learn more about how the American financial system has functioned. It is financed by foreign investors. But global financial conditions are changing rapidly and Japan's shift toward higher domestic yields may become one of the most important turning points in that process. Now, if the world's largest foreign holder views that begins steadily bringing capital back home, the consequences for Washington, for Wall Street, and the global economy could be enormous. Because once borrowing costs start rising in a heavily debt dependent system, the financial pressures can spread very quickly throughout the entire economy. Michael Hudson shared more insights in our recent interview on this and I will go ahead and link the interview in the description below. I highly highly recommend that you watch it next. Hopefully this quick update was interesting and useful. Let me know if you have any questions in the comments below. I will go through the comments section and try to answer your questions in my future videos. Thanks so much for being here. I truly appreciate your time. Have a great rest of your day and I will see you back here tomorrow. to take care.