Separating Fact from Fear in Japanese Investing

Japan is often labeled a ticking time bomb due to its high level of debt and bleak fiscal outlook. Recently, fears have emerged around rising Japanese Government Bond (JGB) yields triggering a global financial meldtown. In our view, these fears are exaggerated.

In this piece, we aim to clarify and correct some common myths around the Japanese economy and investment universe. There are concerns about Japan’s fiscal stability, and there are worries that rising JGB yields will trigger massive repatriational damage and foreign bond outflows. We point to various fundamental factors supporting Japan’s fiscal picture, and explain the structural nature of Japanese holdings of US Treasury bonds (USTs).

Myth: Japan’s economy is a ticking time bomb due to its 250% debt-to-GDP ratio.

Reality: On a net basis, Japan’s debt-to-GDP (around 140% ¹ ) is far lower and more manageable than the 250% gross ratio (Figures 1 and 2).

It is critical to assess a country’s debt net of its financial assets, rather than rely solely on gross figures. The Japanese government holds substantial assets—including large foreign reserves, assets held by quasi-public banks, and pension funds—that offset its liabilities. The gross debt-to-GDP ratio was roughly 240% in 2024, down from 250% in 2020. However, net debt-to-GDP of 140% in 2024 was an improvement from 160% in 2020.

Moreover, Japan remains one of the world’s largest net creditor nations, with net external assets totalling ¥533 trillion (approx. $3.7 trillion) in 2024.²  This, combined with the government’s sizable asset base, paints a far more stable fiscal picture than the gross debt may suggest.

Myth: Japan’s policymakers risk losing control of the long end of the JGB curve due to fiscal worries.

Reality: Japan’s large, stable domestic investor base and the country's ability to remain self-financed for decades continue to anchor long-term JGB stability.

While elevated yields typically reflect rising global borrowing costs amid concerns over fiscal deterioration, Japan’s case is different. The recent weakness in the super-long end of the JGB curve reflects technical supply-demand imbalances and market dysfunction—not a fundamental shift in fiscal outlook. Japan’s fiscal picture remains structurally sound, as the country has a large and stable domestic investor base, and it is able to remain self-financed for decades (roughly 90% of JGBs are held domestically).³  Household financial assets are nearly twice the size of national debt. For more insight, see Japanese Super-Long Bond Weakness: Why We’re Not Sounding the Alarm Bells Just Yet).

Given these factors, the risk of Japanese policymakers losing control of the long end of the yield curve is extremely low, and concerns over a sharp JGB selloff appear overstated. Not to mention that compared to the US, where gross debt-to-GDP is 120% and net is 96%, Japan is unique in having reduced its debt-to-GDP ratio since 2020 (Figure 3). This improvement reflects a combination of stronger GDP growth and higher interest income from Japan’s substantial $3.7 trillion in net external assets. Japan remains the only advanced economy to show a meaningful decline in debt burden over this period.

Myth: JGB weakness portends a global financial meltdown.

Reality: Japan’s US Treasury holdings are structural. Investors are more likely to tap idle yen cash before selling foreign bonds.

Rising JGB yields do not imply a capital repatriation wave or a situation in which Japanese investors are pulling funds from the US, ultimately leading to global market disruption. We believe that concerns of massive repatriation and capital outflows from the US are not warranted because Japan’s US Treasury holdings are structural.

Japanese investors in foreign bonds can broadly be grouped into three main categories:

1. Foreign reserves and public pension funds. These holdings are structural and rooted in Japan’s strategic alliance with the US (see: Are Foreign Investors Really “Dumping” US Treasury Bonds?).
2. Japanese banks. These asset owners hold ample cash at the BOJ, having sold JGBs during past Quantitative Easing phases. As yields rise, their first line of defense will likely be reallocating this cash into JGBs, before selling foreign assets (Figure 4).
3. Japanese life insurers. MOF data shows that Japanese life insurers already reduced their foreign bond exposure (especially USTs) during the 2022~23 Fed hiking cycle (Figure 5). We see limited risk of further selling, though near-term demand remains soft. That said, technical conditions should improve for Asian investors, as the UST curve steepens under a Fed easing cycle and as the term premium reprices. In general, lower hedge costs plus a higher pickup in back-end spreads is a formula that could lead to increased international demand for US bonds—especially in corporate bonds, which offer a spread pickup over Treasury rates.

The Bottom Line

We believe that excessive concerns that Japan’s fiscal situation will lead to a broader financial market downturn are unwarranted. Japan’s debt burden is often overstated, with gross debt cited at 250% of GDP. However, the net debt level is closer to 140%, which is far more manageable. In addition, Japan benefits from a stable domestic investor base that helps to anchor the long-term JGB market. The risk that rising JGB yields could trigger a broader selloff in USTs is also overstated, as structural factors continue to underpin market stability.