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Government debt and the challenges central bank now face

Social media is abuzz with discussions about debt and potential economic collapse. However, these discussions often miss the resilience of the US Treasury market, which is integral to the dollar's status as the global reserve currency.

Despite a debt-to-GDP ratio of 121.6% as of June 2023, the US is still in a stronger position than Japan, where the ratio surpasses 200%. Japan faces tangible risks: higher interest rates could drastically increase debt servicing costs, necessitate tax increases, cut spending, and harm the economy.

High debt also threatens Japan's financial stability, could raise government bond interest rates, and weaken the yen. The Bank of Japan must therefore carefully balance inflation control against the risk of a debt crisis.

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1. Japan government debt now sits at over 200% GDP

Source: Game of Trades

Despite these concerns, Japan's financial system is somewhat shielded because a lot of its debt is owned domestically at low-interest rates. Japan's use of aggressive monetary easing has also helped maintain international confidence in its debt management strategies. Yet, Japan faces challenges like an ageing population and the limitations of its current monetary policies, which continue to complicate the debt sustainability debate.

Coming up:

• There is always a bubble somewhere

• American retail investors continue to set new records

• Foreign companies are pulling out billions in earnings from China

• Global supply chains are now starting to improve

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