Recently, the bond market has become a focal point for global investors, with not only U.S. bonds teetering on the brink of a crisis but also Japan's national bonds coming under scrutiny. Financial expert Ruan Muhua analyzed the reasons behind the collapse of Japan's bonds on the show ‘Listen, Brother Ruan!’ He pointed out that the key factor lies in the ongoing U.S.-Japan tariff negotiations, warning that if the U.S. demands certain actions from Japan, it could directly “end Japan's life.”

Ruan emphasized that Japan's national debt accounts for a staggering 251% of its GDP, far exceeding the U.S. figure of 121%. The reason Japan hasn't faced a crisis yet primarily stems from the fact that the Bank of Japan is the largest holder of its national debt, and the yen has been depreciating over time. However, during the current U.S. trade negotiations, the U.S. aims to push for yen appreciation and interest rate hikes in Japan, leading the Bank of Japan to end its long-standing negative interest rate policy.

During the tenure of former Prime Minister Shinzo Abe and former BOJ Governor Haruhiko Kuroda, Japan attempted to break free from deflationary pressure by increasing money supply significantly, resulting in serious inflation now. The Japanese economy finds itself in a dilemma; inflation is high enough to warrant action, yet raising interest rates to combat inflation would strengthen the yen, consequently leading to a collapse of the national bonds. Ruan pointed out that this is why Prime Minister Shizuo Ishiba remarked that “Japan's fiscal situation is now worse than Greece's.”

He summarized three main reasons for the collapse of Japanese bonds: first, the BOJ's end of negative interest rates and Yield Curve Control (YCC) policy; second, Japan is experiencing structural inflation; third, Japan's fiscal situation is worsening. However, he stressed that another crucial factor, not yet evident but of utmost importance, is Japan's concern over the “New Plaza Accord,” which could potentially lead to dire consequences if the negotiations require yen appreciation and interest hikes from the Bank of Japan. “This would directly threaten Japan's survival!” he stated.

Ruan emphasized that this is why the U.S.-Japan tariff negotiations are so challenging. Japan must give no ground, yet, under immense U.S. pressure, it finds it difficult to maintain a tough stance, mainly due to its reliance on the U.S. market. Additionally, Japan's fiscal deficit is severe, with projections showing a 4.7% deficit against GDP in 2024.

He further stressed that yen appreciation and interest rate hikes are two sides of the same coin; interest rate increases would drive up bond yields and increase Japan's fiscal expenditures, which could lead to the liquidation of overseas assets due to currency appreciation. Therefore, although the BOJ may need to raise interest rates, it cannot sustain significant hikes for long, as Japan's fiscal health cannot withstand such pressure.