The Great Game in the East: Why Japan Is Simultaneously Getting Richer and Going Broke

THE GREAT GAME IN THE EAST: WHY JAPAN IS SIMULTANEOUSLY GETTING RICHER AND GOING BROKE

Japan has the highest sovereign debt in the world (250% of GDP). On June 30, the yen collapsed to 162.27 per dollar [1] — its lowest level since 1986. Why is Japan simultaneously getting richer through exports while bankrupting its own citizens? An investigation into the debt pyramid, demographic collapse, and the new cold war of currencies.

But this is not just another line in financial reports. This is a diagnosis. And it is far more serious than it seems.

DISCLAIMER
This material is an analytical investigation prepared by the editorial board of Kafedra and SforNews magazines as part of a series of studies on the new economic reality. It is based on open data, official documents, and hypothetical analysis. It does not constitute investment advice or a call to action. All conclusions are probabilistic in nature.

THE PARADOX OF A WEAK CURRENCY

It would seem that a weak national currency is a bad thing. But not for Japan. At least, not for everyone.

Japanese exporters — Toyota, Sony, Hitachi — are making super-profits. Their goods become cheaper for foreign buyers, and their revenue in yen grows by leaps and bounds. Japan’s stock market is hitting record highs. The country’s current account surplus exceeds 4% of GDP [10] — a figure that Washington can only count on its fingers while looking at its own deficit.

Today, Japan is a country that is simultaneously the world’s largest debtor and one of its main creditors. Government debt exceeds 250% of GDP [2], yet Japan holds a huge portfolio of foreign assets. It owes money to itself. And this works as long as it works.

But there is a flip side. A weak yen means expensive imports. Japan, lacking its own energy resources, imports almost all of its oil and gas. And prices are rising. The conflict in the Strait of Hormuz, which began in February 2026, hit Japan harder than many others. The Land of the Rising Sun found itself hostage to Middle Eastern geopolitics.

Japanese households are paying more for food, electricity, and fuel. Inflation, which Japan had not seen for three decades, has returned and is biting. Prime Minister Sanae Takaichi’s government is forced to subsidise fuel and energy to soften the blow to consumers. But this is only a postponement.

THE DEBT BOMB WITH A TIMER

Japan’s sovereign debt is a phenomenon without parallel in world history. According to the IMF, in 2026 it stands at 226.8% of GDP [3]. For comparison: the US — 125.8%, Italy — 138.4%. Japan leads by a huge margin.

How is this possible? How can a country have debt more than twice the size of its economy and still not go bankrupt?

The answer is both simple and frightening. About 90% of Japan’s government bonds are held by domestic investors. The Bank of Japan owns more than half of all outstanding government bonds. In essence, the government borrows money from itself through the central bank. Interest rates on Japanese bonds remain historically low, often with negative yields.

This is a pyramid. But as long as people believe in it, it stands.

The problem is that belief is a fragile thing. The IMF directly warns: debt service costs, healthcare, and elderly care will rise, and by 2035 the debt-to-GDP ratio will start increasing again. The demographic collapse — more than 28% of the population over 65 [8] — makes this problem unsolvable within the current model.

THE RATE THAT DOESN’T WORK

On June 16, 2026, the Bank of Japan did what it had not done for 31 years — it raised its key rate to 1% [4]. The last time that happened was in 1995.

The market’s reaction? The yen kept falling.

Because the interest rate gap between Japan and the US remains colossal. Traders continue to make money on carry trades: borrowing in yen at low rates and investing in high-yielding dollar assets. The volume of short positions on the yen reached a record $11.3 billion. Speculators are betting against Japan, and so far they are winning.

The Bank of Japan is trapped. Raising rates further risks collapsing the government bond market and making debt servicing unaffordable. Not raising rates means watching the yen fall and inflation rise.

Bank of Japan Deputy Governor Shinichi Uchida admitted: the risk of a sharp deterioration in the economic situation has decreased, but inflationary risks are increasing. Companies are passing on rising oil costs to each other at “relatively rapid rates.” This is a euphemism. In reality, it means that prices for end consumers will rise.

72 BILLION DOLLARS INTO THE SAND

From April 28 to May 27, 2026, Japanese authorities spent a record 11.73 trillion yen — about $72.5 billion — on currency interventions [5]. That is more than the annual budget of many countries.

The result? The yen strengthened to 155 per dollar, then collapsed again [6].

Finance Minister Satsuki Katayama stated on June 30 that the authorities are ready for “decisive action.” Chief Cabinet Secretary Minoru Kihara repeated this mantra.

But the market does not believe them. TD Securities warns: unilateral interventions have so far been ineffective, and the next round may only come in the 163–165 yen per dollar range.

Japan is spending billions to hold back what cannot be held back. It is like trying to stop the tide with bare hands.

THE AMERICAN ANGLE: WHY WASHINGTON IS WORRIED

It would seem, what does the US care about the Japanese yen? Plenty.

Japan is the largest foreign holder of US debt. If Tokyo is forced to sell US Treasuries to finance currency interventions, it will create additional pressure on America’s government bond market. Treasury yields will rise. Washington’s borrowing costs will increase.

Moreover, a weak yen makes Japanese exports ultra-competitive. This hurts American manufacturers. The trade imbalance between the US and Japan will grow.

And finally, geopolitics. Japan is a key US ally in the Asia-Pacific region. Economic instability in Tokyo weakens the entire alliance. Meanwhile, China is only strengthening its position.

Senator Elizabeth Warren said at recent congressional hearings: “If we don’t do anything, we will soon be importing not only Japanese cars, but also their economic dominance.”

THE RUSSIAN TRACE: INDIRECT BENEFITS

For Russia, the Japanese crisis is a double-edged sword.

On one hand, Japan is a major importer of Russian LNG, especially from Sakhalin. A weakening Japanese economy could reduce demand for energy and lower global gas prices. For Russia, where energy exports are the cornerstone of the economy, this is bad.

On the other hand, any weakening of the dollar and the growing role of Asian currencies play into Russia’s strategy of de-dollarisation. Russia is actively switching to settlements in national currencies, and the strengthening of the yen as an alternative to the dollar is a plus. In addition, the economic weakening of the US, forced to spend resources on maintaining its currency and trade balance, complicates military and financial support for Ukraine.

Russia is strategically interested in a multipolar world. And the Japanese crisis, cynical as it may sound, works towards that scenario.

WHAT NEXT? FOUR SCENARIOS

Scenario One — the dollar continues to pressure. The Fed raises rates, the Hormuz crisis persists, the yen falls to 164–165, Japan conducts new interventions, the effect is minimal. Probability — 50%.

Scenario Two — coordinated US-Japan intervention. Joint action by the Fed and Japan’s Ministry of Finance could temporarily strengthen the yen to 155, but the fundamental factors will remain. Probability — 25%.

Scenario Three — a reversal of Bank of Japan policy. A sharp rate hike to 1.5–2% could stop the yen’s fall, but the risk of destabilising the government bond market is huge. Probability — 15%.

Scenario Four — a collapse of confidence in Japanese debt. A sudden rise in JGB yields, capital flight, the yen falls to 180 and above. A global financial crisis. Probability — 10%.

THE MAIN CONCLUSION

Japan has fallen into a trap of its own success and its own debt. A weak yen is simultaneously a boon for exporters and a curse for consumers. A government debt of 250% of GDP is held together only by faith that the Bank of Japan will continue to buy bonds. But faith is not a strategy.

Japan is too big to fail, too indebted to save.

And for now, this mechanism works only because its own central bank inflates it. But the longer it continues, the more severe the consequences will be when the mechanism fails.

And the weak yen is not the cause. It is a symptom of a much deeper disease. A disease whose name is the exhaustion of an economic growth model based on debt.

LIST OF SOURCES

[1] Macrotrends — historical data on USD/JPY exchange rate, June 30, 2026

[2] Trading Economics — forecast of Japan’s government debt as % of GDP for 2026 (250.00% of GDP)

[3] IMF World Economic Outlook (April 2026) — data on G20 government debt (Japan — 204.4% of GDP)

[4] AZERTAC / Reuters — Bank of Japan raised rate to 1% on June 16, 2026

[5] PrimaMedia.ru — Japan spent 11.73 trillion yen on currency interventions from April 28 to May 27, 2026

[6] Lenta.ru — Yen collapsed to 40-year low, interventions did not help

[7] Trading Economics — forecast of Japan’s current account surplus at 4.50% of GDP in 2026

[8] News of Bahrain / Stat.go.jp — Japan’s population over 65 reached 28.1%

[9] Yahoo Finance — USD/JPY exchange rate on June 30, 2026 (161.8690)

[10] Commerzbank (via FXVerify) — Japan’s current account surplus reached 5.6% of GDP

Prepared by the editorial board of Kafedra and SforNews magazines based on open sources. When citing, reference to the original source is mandatory.