Japan's Triple Crisis: Why the Next Global Shock Will Be Born in Tokyo, Not Washington
Japan's economy is cracking under pressure on three fronts simultaneously. The Bank of Japan is implementing the most aggressive policy tightening in its history, the yen is plunging to multi-year lows, and the demographic situation leaves no room for maneuver. While all attention is focused on the Fed, it is Japan that has accumulated a critical mass of problems capable of triggering a global market shock.
My analysis confirms: at this point, Tokyo is the leading candidate to become the epicenter of the next financial turbulence. The reason is simultaneous pressure along three key vectors.
Bank of Japan's Tightness: Unprecedented Liquidity Withdrawal
The Bank of Japan is demonstrating record tightness. In just the quarter ending June 30, the regulator withdrew 23.5 trillion yen (about $146 billion) from the market. This is the largest quarterly reduction in the entire current cycle. Since the peak of 2024, the central bank's balance sheet has shrunk by 116.9 trillion yen (approximately $726 billion), accounting for 15.6% of its total assets. Now, any assets on the balance sheet are subject to reduction — including exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs). There are no more exceptions.
The result was immediate: the yield on 10-year Japanese government bonds (JGBs) soared to 2.90% — the highest since September 1996. 20-, 30-, and 40-year bonds hit record highs at 3.89%, 4.03%, and 4.055%, respectively. This is a direct consequence of liquidity contraction amid inflationary pressure. The Producer Price Index (PPI) rose to 7.1% year-on-year against a forecast of 6.8%, while the key interest rate remains at just 1.0%. High inflation inevitably pushes for further rate hikes, which will further drain an already depleted market.
Yen Under Pressure: Interventions Not Helping
The second front is the currency market. The USD/JPY pair has settled around the 162 mark, near the yen's 40-year low. Minor interventions in recent days have failed to hold the exchange rate. Japan has already spent $72–73 billion defending its currency this year, but to no avail. A weak yen carries serious risks: Japanese companies are going bankrupt due to rising import costs. To strengthen the currency, the country would have to deplete its reserves and raise rates more aggressively, risking a collapse of its own stock market.
Of particular danger is the yen carry trade — a strategy where investors borrow cheap yen at near-zero rates and invest them in higher-yielding assets abroad. Estimates put its volume still between $4 and $8 trillion. These are yen-denominated borrowed funds invested in US stocks, emerging market debt, and cryptocurrencies. There is already a precedent: in August 2024, a single 0.15% rate hike triggered an unwinding of the carry trade, crashing the Nikkei index by 12.4% in one session — its worst day since 1987.
Demographic Trap: Taxpayers Are Not Being Born
The third, and most complex, problem is demographics. In 2025, 671,236 children were born in Japan — the lowest since records began in 1899. The fertility rate fell to 1.14, well below the replacement threshold of 2.1. For the second consecutive year, deaths exceeded births by 900,000. The population has shrunk from 128 million to approximately 123 million. Nearly 29% of the country's residents are now over 65. Debt is growing, while the workforce needed to service it is disappearing.
My conclusion: Japan has the highest debt-to-GDP ratio in the world at 204.4%. The central bank is draining liquidity, bond yields are at multi-year highs, the currency is collapsing, and future taxpayers are not being born. The combination of these three factors creates a powder keg that could explode sooner than many expect. Investors should keep a close eye on Tokyo — the next global shock will most likely start here, not in the US.