America's Biggest Creditor Is Trapped—And That's Our Problem

The 2024 Market Jolt Was Just the Preview

What if I told you that the U.S. government’s biggest foreign creditor is caught in a financial trap with no good way out—and the decisions they’re making right now could drive up your borrowing costs and tank your portfolio?

I’m talking, of course, about Japan.

Earlier this week, Bank of Japan (BOJ) Governor Kazuo Ueda hinted that a rate hike could be coming at their December meeting. Markets reacted instantly. Japanese government bond yields shot up to around 1.9%—the highest in more than 15 years. The yen jumped, and U.S. Treasuries as well as European bonds sold off.

All from a single comment about reviewing the “pros and cons” of raising rates.

Why such a violent reaction to what sounds like central bank boilerplate?

Because Japan has kept interest rates pinned near zero for nearly three decades. An entire generation of traders, investors, and policymakers has operated under the assumption that Japanese rates would stay there forever. The country became the global outlier—the one major economy that never had to worry about the cost of borrowing.

But that era just ended.

The problem is, Japan’s return to higher rates won’t be pretty for anyone.

In fact, we already got a taste of what happens when the world’s third-largest economy tries to move away from zero rates.

Back in 2024, after the BOJ ended its negative-rate policy and guided short-term rates toward 0.25%, Japan’s Nikkei plunged 12.4% in a single day—the worst drop since Black Monday in 1987. The selloff rippled across the world, wiping out more than $5 trillion in market value as stocks, bonds, commodities, and even crypto were hit amid a violent unwinding of the yen carry trade.

Note: The yen carry trade is where investors borrow cheap yen and funnel it into higher-yielding assets abroad.

Again, that was just Japan nudging short-term rates toward 0.25%. And now the country faces the prospect of more hikes ahead.

Japan’s Impossible Choice

To grasp the stakes here, you need to understand the impossible situation Japan is in right now.

As I mentioned, Japan kept interest rates pinned near zero for nearly three decades. This allowed the country to manage its enormous debt load—255% of GDP, the highest in the developed world. For much of that time, annual interest costs hovered around 10 trillion yen (roughly $65 billion)—astonishingly low given how much the debt had ballooned.

That low-cost borrowing allowed Japan to finance massive budget deficits in a desperate attempt to offset its ongoing population crisis.

Note: Japan is the oldest country in the world—about 30% of its population is over 65—and has the third-lowest fertility rate globally.

But zero rates came at a cost. They punished savers, distorted capital allocation, and forced the Bank of Japan to become the buyer of last resort. Today, the BOJ holds 50% of the entire government bond market because no one else wanted to buy at those yields.

For decades, Japan somehow kept the ship from running aground. But fast forward to 2025 and that already-shaky hull is finally giving way.

Bond investors are fleeing. Debt auctions are failing. Foreign and domestic buyers demand much higher rates to offset inflation and currency risk.

This creates a vicious feedback loop… and when investors lose confidence in your government bonds while rates stay pinned at zero, it’s only a matter of time before your currency faces a collapse.

For Japan, a falling yen is already a huge problem because it makes imports prohibitively expensive—and Japan imports 60% of its food and nearly all of its fossil-fuel energy.

That’s why the BOJ capitulated last year, lifting rates out of negative territory for the first time in years.

But hiking rates further creates a different nightmare. Even small increases make Japan’s debt math catastrophic. As old bonds mature and new ones get issued at higher yields, the interest bill is exploding. In fact, the International Monetary Fund (IMF) expects Japan’s debt-service costs to double by 2030.

In other words: Japan is damned if it raises rates and damned if it doesn’t.

Why This Is America’s Problem

Now, I realize you probably don’t spend much time thinking about Japan’s economy. Most people don’t. It’s on the other side of the world and doesn’t dominate headlines, say, like China.

But Japan isn’t just any country. It’s one of the biggest creditors on Earth.

Japan holds over $3 trillion in net foreign assets and is America’s single largest foreign creditor (with more than $1.1 trillion in U.S. Treasuries as of 2025).

And it’s not just bonds. Japanese institutions have billions tied up in U.S. stocks, corporate debt, and real estate.

But what happens when higher rates in Japan start yanking that capital back home?

It would send shockwaves through global markets—driving up interest rates and making borrowing far more expensive for everyone. And because Japan has its fingers in so many pies, it wouldn’t just rattle Wall Street. It could light the fuse for the next global recession.

And you don’t need a crystal ball to see that rates in Japan must go up. You don’t even need to rely on the word of the BOJ—who would trust a central banker these days anyway? No, you just need to look at what Japan’s new Prime Minister, Sanae Takaichi, has been doing these past few weeks.

In mid-November, just six weeks into office, she rolled out a $135 billion stimulus package “to help spur the economy through government spending and to relieve the impact of higher prices.” Despite a bit of money earmarked for AI, quantum computing, and other buzzwords, most of it looks like pure waste. We’re talking rice vouchers, fuel subsidies, cash handouts—not even infrastructure or so-called productivity investments.

But it’s a decent amount of helicopter money, and that inevitably means more inflation. And Japan is already running north of 2%—pretty wild for a country that was the deflationary poster child for thirty-something years.

That’s why the BOJ has no real choice but to raise rates further. If they don’t, they risk a currency collapse that would send import costs through the roof and trigger social unrest as living standards crater.

And just to drive my earlier point home, here’s where it spills back into America—and the rest of the world. When Japanese rates rise and the yen strengthens, parking money abroad becomes a lot less attractive. So instead of financing the U.S. government’s debt binge, that capital stays home in Japan.

Losing Japan as America’s biggest creditor—and don’t think that can’t happen; China used to hold that title too—would hammer the dollar and push up borrowing costs across the board. That, once again, means higher interest rates for consumers and a brutal market collapse.

Last year, I was struck by how violently U.S. markets reacted to events in Japan. The speed and scale of the sell-off were something we hadn’t seen since the COVID crash in March 2020.

Looking back, it doesn’t feel like an anomaly anymore. It feels like the preview of what’s coming.

Regards,

Lau Vegys

P.S. When overleveraged economies start cracking and central banks run out of options, hard assets become the only real shelter. That’s exactly why Doug Casey has always recommended holding precious metals in your portfolio—and why a significant portion of our Crisis Investing portfolio focuses on carefully selected gold and silver mining stocks, many of which Doug himself owns. We just released our latest issue—if you haven’t read it yet, be sure to check it out.