Japan Is in Trouble. So Are You.

Japan's Oil Crisis Is Just the Beginning

Japanese Prime Minister Sanae Takaichi is in Washington today for what was supposed to be a summit about trade deals and China strategy. Instead, she’s walking into the White House in crisis mode, with Trump pressing her to send warships to the Strait of Hormuz and her economy bleeding from an oil shock that hits Japan harder than almost any country on earth.

She said no to the warships. Easy call, given the mess this war has already become.

The hard part is what comes next. Because Japan isn’t just facing an energy crisis — it was already in serious financial trouble before the first missile launched. And the Hormuz closure just made a bad situation much worse.

If you’re wondering why any of this should matter to you — today’s essay is for you.

Japan’s Oil Problem Is Unlike Almost Anyone Else’s

Let’s start with geography. Japan is an island nation with no meaningful domestic energy production. It imports 87% of its total energy supply — not just oil, everything. And of its crude oil, 95% comes from the Middle East. Roughly 70% of that travels through the Strait of Hormuz.

With Hormuz effectively closed, two-thirds of Japan’s oil supply is currently blocked, diverted, or severely disrupted. Not at risk. Not threatened. Gone.

To appreciate what that means, compare it to other major economies. The U.S. is a net energy exporter — largely insulated from the supply shock by its own production. Europe spent three years scrambling to replace cheap Russian gas with expensive LNG after 2022 — a painful, self-inflicted wound — but at least they had a head start building alternative supply chains before this crisis hit. China, despite being the world’s largest oil importer, appears to have preferential access through the strait — Iranian-flagged and Chinese-owned vessels have been among the few still transiting.

Japan has none of those advantages. No domestic production worth mentioning. No alternative pipeline routes. No preferential access through Hormuz. Just reserves — and a clock that started ticking on February 28th.

Now, if I were Japanese, this whole situation would probably take me straight back to 1973. The Arab oil embargo hit Japan like a freight train. The country imported virtually all of its oil — some things never change — and almost all of it came from the Middle East. When supply was suddenly cut, prices quadrupled almost overnight. Inflation surged above 20%. Panic buying emptied store shelves. The government imposed emergency rationing on gasoline and heating fuel. Industrial output collapsed. It was, by any measure, the worst peacetime economic crisis Japan had experienced since the war.

But look at where Japan sits today. Same island nation. Same near-total dependence on Middle Eastern oil. Same chokepoint. Except this time, Japan is walking into the crisis already carrying the heaviest debt load in the developed world, an aging population, and a central bank that has spent thirty years distorting its financial system to keep the whole thing from collapsing. The 1970s shock hit a Japan that was young, growing, and relatively fiscally healthy. This one is hitting a Japan that is none of those things.

Tokyo is responding the way governments always respond — throw what you have at the problem and hope for the best. Before boarding her flight to Washington to meet Trump, Takaichi announced the largest emergency oil reserve release in Japan's history — 80 million barrels, part of the IEA's record coordinated release of 400 million barrels across member nations. Japan holds roughly 254 days of stockpiles in total, so the lights aren’t going off next Tuesday. But reserve releases buy time. They don’t reopen a strait. And Japan’s LNG reserves — critical for electricity generation — are a different story entirely, covering only about two to four weeks of stable demand.

Meanwhile, the damage is already accumulating. The Nikkei is down more than 11% since the conflict began. Import costs are surging, the trade deficit is widening, and inflation is accelerating — all while the yen weakens, making everything more expensive still.

Why This Is America's Problem Too

Japan’s energy crisis is serious. But the bigger story is that it’s landing on top of a financial crisis that was already quietly unfolding — one with direct consequences for American markets.

Japan, you see, carries the heaviest debt load in the developed world — 255% of GDP. For decades, the country managed that burden by keeping interest rates pinned near zero. Borrow cheap, roll the debt over, keep the interest bill manageable. It worked, sort of, for thirty years.

Then came 2025. With the yen weakening and import costs rising, the Bank of Japan (BOJ) spent the past year hiking rates for the first time in a generation. And that created a massive problem — because when you’ve kept rates near zero for three decades, entire financial strategies get built around them. And none more consequential than the yen carry trade.

Here’s how it works. Investors borrow yen at rock-bottom rates, convert it into dollars, and deploy it into higher-yielding assets abroad — U.S. Treasuries, stocks, emerging market debt, you name it. It’s essentially free money, as long as two conditions hold: Japanese rates stay low, and the yen stays weak. When either of those flips, the math breaks. Positions that made sense at zero rates no longer work. Investors unwind them — sell the foreign assets, convert back to yen, repay the loan.

Well, that unwind was already in motion before February 28th — courtesy of the BOJ's rate hikes.

And where does Japan hold the biggest chunk of that capital? Right here. Japan is America’s single largest foreign creditor, with $1.2 trillion in U.S. Treasuries alone. Add in U.S. stocks, corporate debt, and real estate, and you’re talking about hundreds of billions more.

Now, think about what happens when a country with its fingers in this many pies starts pulling them out. Treasury yields spike. Borrowing costs rise across the board — for corporations, for homebuyers, for the federal government trying to service its own ~$39 trillion debt load. It shows up in your mortgage rate, your 401k, your cost of capital.

Enter the Iran war and the closure of Hormuz.

Remember — Japan imports 95% of its crude from the Middle East, roughly 70% of it through that single strait. With it closed, Japan’s trade deficit is exploding, the yen is weakening further, and inflation — which was already the reason the BOJ started hiking in the first place — is running hotter still.

Now, the BOJ held rates steady today — kicked the can — because raising them too quickly risks blowing up the interest payments on a debt load that’s already 255% of GDP. But with inflation about to get a lot worse thanks to the oil shock, they won’t be kicking it much longer.

When Japan inevitably unleashes another round of rate hikes — and they will — it’ll be like opening a pressure cooker that’s been sitting on high heat. U.S. markets will feel it first.

We already got a taste of what that looks like. In August 2024, the BOJ raised rates to just 0.25% — a rounding error by any normal standard — and global markets lost over $5 trillion in value. That was one small move from a Japan facing a fraction of the pressure it’s under today.

Bottom line: if the Hormuz closure continues, what we saw back then will look like a warm-up. And if it starts looking like the 1970s — buckle up.

Regards,

Lau Vegys

P.S. As I've written recently, Japan isn't the only large holder of U.S. assets facing pressure right now. Gulf oil producers are watching their revenues collapse — and when that happens, they sell too. The U.S. may be about to find out what it looks like when its two biggest creditor blocs start heading for the exits at the same time. In our latest Crisis Investing alert, we recommended a position designed to capitalize on exactly this kind of unraveling. Make sure you haven't missed it. And even if you're not a paid subscriber yet, the lead is free to all.