Cryptocurrencies: Japan faces growing concerns about a debt crisis, which some economists believe could come sooner than most investors think. This is pointed out by Robin Brooks, an economist and senior fellow in the Global Economy and Development program at the Brookings Institution. According to him, Japan is “trapped” in a vicious circle of high debt, rising inflation, and pressure on interest rates — which could have a major impact on the crypto market.
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Debt exceeds 240 percent of GDP
Japan has long had the highest public debt-to-GDP ratio among advanced economies, currently around 240 percent. After the COVID-19 pandemic and massive government spending, investors’ tolerance for such high debt has decreased. In addition, since mid-2022, Japanese inflation has accelerated significantly, reaching levels not seen since the 1980s.
Higher inflation raises government bond yields and makes government borrowing more expensive. “If Japan keeps rates low, it risks further yen weakness and uncontrollable inflation. If, on the other hand, it allows yields to rise, it jeopardizes the sustainability of its debt,” Brooks summarizes in his post on Substack.
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Cryptocurrencies as an escape valve
According to experts, fears of a debt spiral could lead investors to seek alternative “safe havens,” including cryptocurrencies—especially stablecoins. Japanese startup JPYC, for example, plans to issue the first stablecoin pegged to the Japanese yen later this year.
Despite this year’s 7 percent strengthening of the Japanese yen against the dollar, caused by the expected decline in interest rates in the US, the fact remains that since 2021, it has lost more than 40 percent of its value. This is driving up domestic inflation and increasing pressure on the government.
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US recession as a temporary rescue
According to Brooks, a possible recession in the US could bring some relief to Japan. If US GDP were to decline for two consecutive quarters, global investors could start buying government bonds in large quantities, which would lower yields and give Japan time to consolidate. However, according to Brooks, Japan will ultimately have to take unpopular measures, such as cutting spending or raising taxes. Whether the public will accept this remains to be seen.
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