This is the scariest chart I’ve seen in years

Here is what I wrote at the start of the year:

The number
one risk I see in the foreign exchange market in 2026 is Japan. The yen has
been struggling for the past six months and it’s close to a boiling point in
Tokyo. There were some stronger warnings about FX intervention late in
December. Japan is the most-indebted major economy in the world and the
demographics are terrible. The US is leaving a lot of uncertainty around its
alliance with Japan and China is eating its lunch in manufacturing.

There is
something of ‘boy who cried wolf’ situation around Japanese debt as people have
been calling for a crisis for 20 years but Japanese borrowing costs are hitting
30 year highs. These things can escalate quickly and could turn into an
international problem.

I didn’t expect it to blow up so quickly. Today’s jump in 30-year Japanese borrowing costs is frightening. This is a market that had 25 basis point trading ranges for entire years, and rates climb by that same amount this morning.

The turmoil in Japan was set off by Senae Takaichi calling an early election and promising more spending. That’s been the playbook in Japan for a generation but with debt to GDP at 230% and the global order collapsing, it’s a bridge too far.

I think there is still a strong sense of disbelief that this could really spiral into a crisis as people have been warning about Japanese debt for a generation. Is the wolf really at the gate?

The hope was always that because Japan’s debt is largely held within its borders that it’s safe. Even if that’s the case, the relief valve is the yen. But if the yen falls then the Bank of Japan will be forced to hike rates and cripple the economy, setting off a spiral.