Martin Armstrong
Japan's exports increased by 13.7% in the first six months of the year to 60.66 trillion yen.
Imports increased by 10.7% to around 61.9 trillion yen.
Nevertheless, Japan continued to import more than it exported, despite specified a weak yen that nipponese products should be highly competitive abroad.
Data from June they show that exports increased by 19.3% year-on-year, which means the tenth consecutive monthly increase.
However, imports increased by 25.4% to evidence 11.3 trillion yen.
This left Japan with a deficit of 406.9 billion yen for June, more than 3 times as expected by economicists of 120 billion yen.
Japan recorded a surplus of 122 billion yen in June 2025.
Japan relies heavy on imported energy.
The conflict with Iran and the disruptions around the Strait of Ormuz raised oil prices, forcing Japan to search supplies from further sources.
The volume of oil imports to Japan actually fell by 13.7% in June, but the value of these imports increased by 59.3%.
Japan bought little oil and paid much more for it.
This is simply a consequence of the collision of a weak currency with an external energy shock.
Jen fell above 163 to the dollar, which is the weakest level since 1986.
The year before was about 140 points.
Each barrel of oil, natural gas shipments, imported food products and abroad industrial ingredients become more costly erstwhile valued in yen.
Japan has accumulated the highest burden of sovereign debt in an industrialised world, while interest rates were artificially kept close to zero.
Government debt exceeds 200% of GDP according to virtually all major global estimates, while wider measurements indicate a burden above 230%.
Politicians have convinced themselves that debt does not substance due to the fact that nipponese institutions hold most of its share and the Bank of Japan can always buy anything that the private marketplace rejects.
The Bank of Japan held about 485.4 trillion yen in nipponese government bonds for March 2026, which represents 47.9% of the issued JGB according to government calculations.
This is not a free market.
The central bank has become a marketplace due to the fact that the government would not be able to finance this mountain of debt at average interest rates.
This solution worked only erstwhile inflation remained low and the yen maintained public confidence.
Both diseases are breaking down now.
The Bank of Japan raised its interest rate to 1% in June, which is the highest level in 31 years.
Under average circumstances, raising interest rates would aid to support the currency and halt inflation.
Japan does not work under average circumstances.
Each rate increase gradually increases the cost of refinancing government debt that has been accumulated under zero interest rate policy.
Japan's budget for the fiscal year 2026 is simply a evidence 122.3 trillion yen.
Debt handling expenditure, including interest and payments, increased by 10.8% to 31.3 trillion yen.
This means that over a 4th of government spending is already consumed by earlier debt.
The Ministry of Finance estimates that debt handling costs can scope 40.3 trillion yen by fiscal year 2029, accounting for about 30% of full government expenditure.
yearly bond issuance is expected to emergence by 28% from 2026 to about 38 trillion yen by then.
The government will issue additional debt mainly due to the fact that handling existing debt becomes more expensive.
This is simply a government debt spiral.
fresh bonds must be issued to pay interest and buy old bonds.
As feet rise, the government requires even more borrowing.
With the increase in loans, investors request higher profitability to offset fiscal and monetary risks.
The process feeds on itself.
The profitability of Japan's 10-year government bonds reached around 2.74% on July 22, or above a percent point above the level of 1 year ago.
Japan built its fiscal strategy around the feet close to zero.
The rate of return of 2.74% may seem irrelevant to an American investor who remembers much higher yields of government bonds, but this comparison is irrelevant.
The hazard depends on the size of the debt vis-à-vis the government's taxation base, not just on the nominal interest rate.
Japan's bank is trapped.
If he aggressively raises interest rates to defend the yen, he increases the costs of handling government debt and causes losses to banks, insurers, pension funds and another government bond institutions.
If the rates stay besides low, the capital will drift distant from the yen, the currency will decrease, and the imported inflation will accelerate.
If mass purchases of bonds resume, it confirms that the debt cannot be financed naturally, which further undermines assurance in the currency.
Tokyo has already spent an estimated $215 billion on intervention in currency markets, yet the yen has fallen to its lowest level in 40 years.
Monetary intervention cannot remedy structural fiscal imbalances.
The government can temporarily buy its currency, but cannot force global capital to trust politicians that no longer make sense.
Japan can no longer defend the currency without threatening the bond market, supporting the bond marketplace without weakening the currency, subsidising energy without issuing further debts or raising taxes without harming the already burdened population.
Japan's ageing society is deteriorating.
The taxation base is decreasing, while pension, medical and social obligations are increasing.
Social safety spending in the fiscal year 2026 reached about 39.1 trillion yen.
Debt and social safety services together absorb a immense proportion of government spending before politicians fund defence, infrastructure, education, energy subsidies or anything else.
The US$6.2 billion trade deficit is modest compared to Japan's full economy and in itself is not a signal of state insolvency.
Anyone who claims 1 commercial study proves Japan's bankrupt is overreacting.
The importance of this study is that it shows the mechanics of tightening: war increases energy prices, weak yen increases them, imports overwhelm export growth, inflation puts force on the Bank of Japan to rise interest rates, and higher interest rates increase the cost of handling the world's largest debt burden on developed markets.
Japan is the first dominant due to the fact that it pushed modern monetary experiments further than any another large economy.
It normalised zero and negative interest rates, allowed the central bank to dominate the government bond marketplace and assumed that national savings would finance public deficits forever.
Europe and the United States later followed the same path, believing that they could avoid Japan's fate.
Fitch now predicts government debt in developed markets will scope record $75.8 trillion by the end of 2026, corresponding to 104% of global GDP.
The 10 largest developed economies will be liable for $69 trillion of this sum.
Japan may stay the most utmost example, but this is not an isolated case.
The trade deficit with Japan is another informing shot.
The sovereign debt crisis will not necessarily start with a formal announcement by the Ministry of Finance.
It will start with currency weakness, failed intervention, rising bond yields, imported inflation, home capital under its own ownership and an expanding share of taxation gross channelled on interest.
Japan is not just experiencing a weak yen or temporary energy problem.
It is approaching a point where all policy available is causing another crisis elsewhere.
This is how trust begins to fall apart, and erstwhile trust turns against government debt, no central bank can reconstruct it, simply creating more money.
https://www.armstrongeconomics.com/international-news/Japanese/is-the-first-domino-in-the-overeign-debt-crisis/
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