BEYOND THE NIKKEI HIGHS: THE $ 1.9 TRILLION SOLVENCY CRISIS CRIPPLING JAPAN
Wonder who the major holders of JGBs in the world are? Here is the answer:
- ~50% held by the Bank of Japan
- ~17.5% held by Japanese insurance companies
- ~15% held by Japanese banks
- ~8% held by foreign investors
Wonder how underwater those financial institutions are, starting from the BOJ, holding JGBs in their books? A good proxy is the iShares Core Japan Government Bonds ETF (ticker: 2561), even if it was only listed in 2021.
According to the latest official data, back in September 2025, the total notional amount of Japan Government Bonds outstanding was JPY 1,088.2 trillion, roughly USD 7 trillion. If we use the 2561 ETF as a proxy to mark to market those JGBs, the total paper loss on JGBs holdings is roughly USD 1.9 trillion. Yes, my dear reader, ONE POINT NINE TRILLION UNITED STATES DOLLARS.
Now, based on recent estimates, the total amount of capital held by Japanese life insurance companies overall is between JPY 20 trillion and 25 trillion (USD 135 billion to 170 billion). Since non-life insurance companies don’t hold a significant amount of long-dated JGBs, let’s assume 17.5% of all the JGBs are held by life insurance companies and that the duration of that portfolio is 7 years (which we know is wrong, but let’s help them out a bit). Consequently, the total amount of losses in the system is equivalent to USD 332 billion on their JGBs alone. Yes, my dear reader, the whole Japanese life insurance system is theoretically insolvent. What about banks? Based on recent estimates, the total amount of capital held by Japanese banks overall is between JPY 30 trillion and 35 trillion (around USD 200 billion to 240 billion). The total amount of JGBs paper losses that all these banks are sitting on? Roughly USD 285 billion. Yes, my dear reader, the Japanese banking system as a whole is theoretically insolvent too. I am sure someone now would feel itchy to point out that, for sure, banks used hedging to cover their risk. However, those familiar with how hedging works will quickly reply that hedging with derivatives is a transfer of risks within the system; it does not eliminate them. Consequently, as a whole, the Japanese life insurance and banking systems remain theoretically insolvent. Furthermore, we are not even considering the mark-to-market losses rising yields are creating in all other assets they hold, like loans or foreign investments. What’s even more ridiculous is that the BOJ, a.k.a. their lender of last resort, is sitting on USD 800 billion of paper losses on its JGBs holdings.
In the post-GFC world, no one cares about paper losses on government bonds anymore since regulators like to assume that banks can hold those assets till maturity, and high-rated governments like Japan will never default. Hence, those losses will be dealt with over time. If this assumption were correct, then why, back in 2023, did the FED rush to set up the BTFP facility to bail out US banks that were falling like dominoes after Silicon Valley Bank and First Republic Bank defaults?
Yes, as you can intuitively understand, higher and higher yields on government bonds lead to a liquidity crisis in the banking system. However, as I said many times, banks can remain insolvent for a very long time as long as they have liquidity to meet claims. Credit Suisse is the perfect example since it took over two years to default after the massive hole Archegos created in its books in 2021, on top of losses on assets generated by rising yields at a speed nobody at the time, except myself and a few others, expected, since central banks successfully brainwashed people to believe that after COVID, rates would have remained very low for a very long time since for many years they didn’t have to deal with that terrible beast called inflation.
If anything, the JPY is too strong right now compared to fundamentals, and the only reason why it does not weaken at a faster pace is the Japanese government’s constant threat to intervene in the FX market using its “war chest” of roughly USD 1.5 trillion of US Treasury bonds (“Japan escalates forex intervention threat as yen nears 160 per dollar“). War chest that, unfortunately for them, is being eroded in value due to the out-of-control inflation in the US, even if it is government policy to deny it and fake the numbers to a level that hides the true reality people are living. Investors aren’t stupid, though; this is why long-term US Treasury yields aren’t coming down as everyone, except myself and a few others, again expected (“IF THE FED CUTS RATES, THE DAMAGES WILL BE FAR GREATER THAN THE BENEFITS“).
Despite the Nikkei reaching an all-time high beyond 53,000, nobody in Japan is popping champagne bottles to celebrate that. The reason? Very few households in Japan hold stocks, while the vast majority sit on large cash savings. Cash savings in JPY that are being eroded at a blistering pace by the out-of-control monetary inflation created by the BOJ. So, yes, the population is being forced to bail out its own financial system, and I fear very few are aware of what’s happening. Perhaps when the government won’t be able to keep the JPY from collapsing in value anymore, similar to what happened to other countries in the past, like Argentina, Venezuela, or most recently Turkey, they will finally realise how they have been royally screwed. Sadly, it will be too late to deal with it at that time, and Japan, a country with very few natural resources, might sadly fall into economic oblivion.
For the first time in over a decade, the New York Fed is openly signaling intervention in the Japanese yen. https://t.co/FEljpfa5LL
— Guillermo Ruiz Zapatero (@ruiz_zapatero) January 25, 2026
The episode highlights deep structural problems of both economies.
The government’s borrowing costs are a quarter of spending and projected to reach 30 percent of outlays in three years. But without higher rates, the yen will continue to weaken.The US faces similar challenges with continuous budget deficits (6 percent at present) and rising debt from large serial crises, increased defence spending, and demographic pressures. Like Japan, it has become addicted to expansionary fiscal settings, low rates and loose monetary policy to sustain growth. The US faces additional constraints because of high levels of private debt alongside unsustainable government borrowing, a large trade deficit and low domestic savings. Deindustrialisation means that many of these problems, like the trade imbalance, are difficult to correct.
America is increasingly dependent on leverage speculation, in the form of basis trades, to fund the government. Japan is domestically financed—90 percent of Japanese government bonds are held by local investors. In contrast, the US is reliant on foreign capital, with overseas investors holding roughly 30 percent of government debt as well as significant amounts of corporate equities and bonds. Like Japan, it can’t afford rates to rise or reduce foreign demand for its securities.
The US government must re-finance around a third of its debt every year as it funds increasingly with short-dated Treasury bills to minimise borrowing costs. Its annual gross financing needs are around 45 percent of GDP and rising.
The only solution is a return to fundamentally sound fiscal and monetary disciplines alongside international co-ordination. Neither government seems willing to take decisive action for ideological reasons as well the overwhelming financial and economic costs.
Japan and America foreshadow the approaching economic endgame. Without policy changes and steely political resolve to address the core issues, a crisis appears inevitable. It will take the form of an unprecedented financial crash and the failure of the currency system, which will, in turn trigger a collapse of economic activity, societal and political breakdown. Given the importance of the two economies, the effects will be global.
Satyajit Das | Former banker and author of The Everything Bubble (2027)
(Views are personal)
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