While much of the attention of cryptographic and traditional markets remains in the United States, a recent analysis of a leading economist suggests that it is time to look east.
Japan is staggering on the verge of a debt crisis, but a possible recession in the United States could provide the land of Sun Rising a temporary relief window, according to Robin Brooks, a senior member of the Global Economy and Development Program at the Brookings institution.
Japan’s debt to PCD is a problem
For years, Japan has maintained the highest relationship of public debt / GDP among advanced economies, constantly around 200%. However, in the era after the COVID marked by a massive fiscal expense, the tolerance of investors for such high debt levels has decreased.
To complicate things, the inflation of Japan, measured by the consumer price index (CPI), has increased since mid -2022, which has inflation rates at levels not seen since the 1980s. The trend is consistent with the pressures of sticky prices throughout the world.
High inflation has pushed the yields of government bonds and increased the cost of additional tax loans. These combined pressures have pushed the amazing relationship of debt to Japan’s GDP of around 240% in the care center, effectively boxing the government in a difficult position.
Brooks expressed it better in his last livelihood: “The conclusion is that the exceptionally high government debt is putting Japan in a terrible link. If Japan stays with low interest rates, it runs the risk of a depreciation of yen even more, which could make inflation run out of control. If you anchor the yen when allowing the yields to increase even more from Japan at risk. “
“This CATCH-22 means that a debt crisis is much closer than people think,” he added.
The growing debt concerns could bring investors to alternative financial exhaust valves such as cryptocurrencies, mainly Stablecoins. The JPYC Japanese startup plans to broadcast the first stablecoin linked to Yen at the end of this year.
The YEN has been appreciated in almost 7% to 146.50 per US dollar this year, since the expectations of the Fed rates cuts have led to a large base dollar sale.
However, Zoom Out tells a completely different story. Since 2021, Yen has depreciated for a 41%solid, which adds to domestic inflation.
Meanwhile, the 10 -year Japanese bond yield increased to 1.60% from almost zero in 2020, reaching its highest level since 2008. The 30 -year yield has also reached the maximum of multiple decades. In other words, investors demand a higher premium to give money to the Government to compensate for the growing tax risks.
The recession of the United States can offer temporary relief
Japan can find some relief in a possible recession of the United States, marked by consecutive quarterly contractions in GDP. Such a situation would see investors worldwide the money of the park in government bonds, conducting the lowest yields. (Bond yields and prices move in opposite directions).
The resulting fall in Japanese returns could buy time for Japan, according to Brooks.
“It is possible that the United States enters recession, which will cause US and global yields to fall. That will buy Japan’s time. But, in the end, the only sustainable form of this capture -22 is that Japan reduces the expense and/or increases taxes,” Brooks said.
Even so, the big question remains: Japanese citizens will accept higher taxes and expense cuts? Only time will say it.
