From Market Support to Letting Go: Will Japan, the largest holder of Japanese bonds, reducing its holdings lead to it becoming the next Greece?

For a long time, Japan has relied on massive purchases by the central bank to support the bond market, and the exit of this "big buyer" is gradually affecting the market. The value of 40-year Japanese government bonds has fallen by more than 20% in the past six weeks, with yields soaring to 3.5%. The structural debt is too high, economic growth is weak, and real wages are shrinking, leading one to wonder: "Will Japan be the next Greece?"

Japan's bond market turmoil: 40-year bond prices plummet over 20%

Financial media Kobeissi Letter pointed out that within just one and a half months, the yield on Japan's 40-year government bonds skyrocketed from 2.3% to 3.5%, causing bond prices to experience a fall of over 20%. This surge in yields is not just a market adjustment, but a violent rebound after a long period of suppression. The yield on 30-year government bonds also surged by 100 basis points within 45 days, reaching a historical high of 3.2%.

For Japanese government bonds, which have always had low volatility, this is a rather unusual phenomenon, enough to shake international capital's confidence in Japan's fiscal stability.

The Bank of Japan has supported bonds for many years, and now a crisis is emerging.

The core of this storm is believed to be the shift in policy of the Bank of Japan (BOJ). For many years, the BOJ has continued to purchase government bonds through quantitative easing policies (QE), playing the role of the largest buyer and stabilizer in the market. However, with rising inflation and increasing pressure for policy normalization, the BOJ has gradually reduced its buying scale by initiating quantitative tightening (QT) starting in 2024, which immediately reveals structural imbalances in the market.

Bloomberg data shows that the BOJ currently holds as much as "52%" of Japanese government bonds, far exceeding the ratios of life insurance companies (13.4%), commercial banks (9.8%), and pension funds (8.9%):

In other words, the Japanese bond market has evidently become a "distorted structure" that long relies on central bank support.

Japan's debt reaches 7.8 trillion USD, becoming one of the top five indebted countries.

The total debt of the Japanese government currently reaches 7.8 trillion USD, with the debt-to-GDP ratio exceeding 260%, setting a historical record, making it one of the top five most indebted countries in the world, and also twice that of the United States. This has forced Prime Minister Shigeru Ishiba to admit in parliament: "Our financial situation is even worse than Greece."

Recently, the auction of Japan's 20-year government bonds has seen a tepid response, with demand clearly insufficient, highlighting that investors no longer view Japanese bonds as "low-risk assets." Instead, they are looking at each other, with no one willing to become the "greater fool" after the BOJ lets go.

When bond demand declines, prices fall, and interest rates rise, the government's financing costs will quickly increase, triggering a "bond yield vicious cycle."

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It is not difficult to see that when the market begins to reassess sovereign risk and the central bank is no longer a solid backstop, the sustainability of Japan's debt will be challenged.

Economic slowdown, rising inflation, and a sharp decline in real wages: Japan is entering stagflation.

More severely, Japan's real GDP in the first quarter of 2025 shrank by -0.7%, significantly lower than market expectations. At the same time, the consumer price index in April increased by 3.6% year-on-year, with core CPI rising by 0.7% month-on-month, marking the largest increase in nearly a year, indicating that the country's economy is falling into a typical state of "stagflation."

Equally concerning is that Japan's real wages have decreased by 2.1% year-on-year, reaching a two-year low, indicating a rapid loss of purchasing power among the public, making the recovery of domestic demand even more difficult. This situation of "rising inflation, declining wages, and stagnation in growth" is one of the warning signs before the fiscal crisis erupted in Greece.

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The Bank of Japan is caught in a dilemma: both QT and QE are dead ends?

Currently, the situation of the Bank of Japan can only be described as a dilemma. Whether it conducts QT or QE, the Bank of Japan will face unbearable costs. First, if it continues to implement its quantitative tightening plan, reducing the monthly bond purchase amount will trigger a further surge in government bond yields:

According to estimates, when the Interest Rate rises by 0.5 percentage points, the market's bond book losses will reach 58 trillion yen, enough to crush the capital adequacy ratio of some banks, posing a systemic risk to the financial system.

However, if the BOJ chooses to do the opposite and restart quantitative easing to depress yields, the consequences will also be unbearable:

The restart of QE will inevitably further depreciate the yen, exacerbating imported inflation ( pressure, and triggering high doubts among international investors regarding Japan's fiscal discipline and the independence of its central bank.

This kind of dilemma highlights the structural distortions in the Japanese bond market and the aftereffects of years of loose monetary policy. When the central bank no longer has the capacity for "unlimited buying orders," the real market risks are just beginning to surface.

What has Japan taught us about the beginning of the bond market bubble burst?

For many years, the market has been accustomed to the stable dream of the Bank of Japan's unconditional buying. But when the BOJ began to exit, the structural risks in the Japanese bond market and the truth about the fiscal deficit finally came to light. Today, Japan faces a triple dilemma similar to that of Greece back then: excessive debt, economic contraction, and loss of domestic confidence.

)Ray Dalio warns that the global order is facing a once-in-a-century collapse: a storm of debt, currency, politics, and tariffs is intertwining (

This is not just a problem for Japan; it may also be a preview of the future for other highly indebted economies: "When central banks can no longer act as saviors, the real risks will begin to be priced by the market."

This article From Supporting the Market to Letting Go: Will Japan, the Largest Creditor of Japanese Bonds, Become the Next Greece After the Bank of Japan Reduces Holdings? Originally appeared on Chain News ABMedia.