Japan’s Bond Market Warning for America

When interest rates are near zero, government debt doesn’t matter.

That was the theory at least, in the previous decade, not just from economists on the fringe but also from a few in the mainstream. If rates stayed low, the argument went, the US didn’t need to worry about debt.

And it didn’t. Debt increased, and economists who cautioned against it (ahem) were dismissed as cranks, with many of our critics pointing to the history of one nation: Japan, which managed to keep interest rates low even as its debt grew to more than 200% of its GDP.

Reality, however, has a way of catching up with theory eventually, and now it has for Japan.  

If it increased rates to fight inflation, then debt costs would balloon. If it kept rates low and let inflation run high, the yen would depreciate. In the end, it chose the second option.

The timing couldn’t be worse, with Japan mulling more fiscal expansion to revamp its economy, and it’s now risking a full-on debt crisis.

The lesson here is that inflation risks never disappear. Inflation has been a risk since the creation of currency. 

Yes, monetary policy is much better at containing it, but as the world learned after the pandemic, inflation can always come back.

Governments can sometimes run up big debts and nothing happens, but it is not a long-term strategy. 

Or, to use a more homely (sorry) analogy: You can build a house on a fault line and live there for decades without it being destroyed in an earthquake, but that doesn’t mean it was a smart thing to do.

Allison Schrager Bloomberg February 2, 2026

https://www.bloomberg.com/opinion/articles/2026-02-02/japan-s-bond-market-has-a-warning-for-america

Japan

https://englundmacro.blogspot.com/2026/01/japan.html

Jag beundrar inte bara Gillian Tett. Även Allison Schrager är smartare än en femteklassare.

https://englundmacro.blogspot.com/2026/01/jag-beundar-inte-bara-gillian-tett-aven.html