At the end of March 2025, Japan’s public debt reached historic levels: over 2,300 trillion yen, equivalent to 234.9% of GDP. This record comes with a distinctive characteristic: the vast majority of this debt is held domestically. The Bank of Japan (BoJ) holds approximately 46.3% of it, whilst Japanese insurers and banks hold 15.6% and 14.5% respectively.
This configuration has so far ensured a degree of stability, but it is becoming increasingly fragile as the BoJ reduces its role as the primary buyer of government bonds.
The End of the Easy Liquidity Era
For years the BoJ supported the economy by aggressively purchasing JGBs (Japanese Government Bonds), keeping interest rates low. Now, however, it is proceeding with a gradual reduction of purchases: approximately 400 billion yen less per quarter, with a further slowdown in the tapering programme scheduled from 2026.
This decision aims to “normalise” the bond market, but it carries immediate consequences: more bonds on offer, reduced demand, and rising yields. Auctions of 40-year bonds have recorded unusually weak demand, with the bid-to-cover ratio falling to 2.2, the lowest level since July 2024. Yields on ultra-long bonds are now at multi-decade highs: 3.6% on the 40-year, approaching 2.9% on the 30-year.
A Fragility Reminiscent of the “UK Case”
According to Barclays, the ultra-long end of the JGB market is the most vulnerable. Weak demand, the absence of independent fiscal oversight bodies, and the growing weight of foreign investors — who, whilst holding only 6–12% of the debt, are highly active in trading — create fertile ground for sudden shocks.
The comparison that causes most concern is with the “gilt crash” of 2022 in the United Kingdom, when a collapse of confidence caused yields to spike and plunged British pension funds into crisis.
A Problem That Extends Beyond Japan’s Borders
Rising interest rates in Japan are not solely a domestic matter. A sharp increase can threaten the “yen carry trade”, a financial strategy based on borrowing in low-cost yen to invest in higher-yielding assets abroad. Should Japanese rates continue to rise, capital currently parked in markets such as the United States could return rapidly, triggering global turbulence.
The Challenge of Fiscal Sustainability
The International Monetary Fund warns that, should rates remain elevated, the interest cost on Japan’s debt could double by 2030. This would compel the government to allocate an ever-greater share of resources purely to debt servicing, curtailing its capacity to spend on other strategic areas.
This makes it urgent to develop a debt management strategy that goes beyond simply reducing the BoJ’s intervention, and that is capable of stimulating robust demand from both domestic and international investors.
Politics and the Central Bank: A Difficult Balance
The BoJ is operating in a complex political environment, marked by uncertainty and fragile leadership. This limits the possibility of swift, coordinated action between monetary and fiscal policy.
The dilemma is clear: continue the normalisation of monetary policy to reinforce the BoJ’s credibility, or maintain accommodative conditions to ensure market stability and debt sustainability. Either path entails substantial risks.
In summary, Japan today stands at a historic crossroads: managing record public debt in a rising-rate environment requires balance, coordination, and a long-term strategy. This is a challenge that concerns not only Tokyo, but the entire global financial system.