Transcription
For 75 years, a coal miner in Britain went to work with a small cage in one hand. Inside the cage was a canary. The practice started in 1911 after a physiologist named John Scott Haldine studied a mine explosion and worked out that a small bird would die of gas poisoning long before a man would.
Now, Britain used live canaries in its coal mines until 1986, the same year the CD went mainstream. Now, the bird was not a pet. It was the most important piece of safety equipment the minor owned. Because when the canary stopped singing, you ran.
Now, when it comes to the global economy, Japan is the canary and the bird has stopped singing. Now, for the last several weeks, I've been walking you down one long mind shaft. And the argument has been simple. America is sleepwalking into a debt trap. But here's what I did not tell you last week. America is not the first one in the mineshaft.
Of every wealthy economy on Earth, Japan is the one least able to feed itself. It produces about a 100,000 barrels of oil per day, but it burns about 3 million. Japan imports roughly 97% of all the oil it uses and almost all of it comes through the straight of Hormuz.
Now the strength of the Japanese yen is measured by how many of them it takes to buy one US dollar. So when that number climbs the yen is actually getting weaker. Japan's currency has been falling and falling fast, lower today than it's been in nearly 40 years. And that's a problem because Japan carries more government debt than any advanced economy on Earth. And everything the United States Federal Reserve now reaches for in a potential economic crisis, Japan reached for first.
Now, stay with me because this is the foundation of the whole argument. Let's take it back to 1989. At the end of 1989, Japan was actually the envy of the planet. Its stock market, the NIK, peaked at over 38,000, a number it would not see again after it crashed for 34 years. At the top of the bubble, it was said that the land underneath Tokyo's Imperial Palace was worth more than the entire state of California. But then it burst. And it kept on bursting. Not for years, but for decades. 30 years of stagnation, of falling prices, and an economy that simply would not grow.
Now, to fight it, Japan reached for tools that no modern country had ever used. It cut interest rates to zero in 1999, nearly a decade before the US Federal Reserve would do the same. It invented modern money printing. The Bank of Japan launched the world's first quantitative easing program in March of 2001, 7 years before the words quantitative easing even entered the American vocabulary in 2008.
Now, quantitative easing is just central bank speak for money printing with a politer name. The bank creates new money and uses it to buy bonds, pushing interest rates down and bond prices up. And in 2016, Japan pioneered the most aggressive tool of all, yield curve control. A complicated name for a radical but very simple idea. The central bank stops letting the market set the government's borrowing rate and just pins it wherever it wants by promising to print however much money it takes to buy the government bonds and keep the price exactly where they want it.
Now sit with what that means. Everything the Federal Reserve did after 2008, zero rates, money printing, pinning yields, Japan did it first. Washington did not invent the modern central bank playbook. It imported it from Tokyo. And here is the bill for running the experiment the longest. Japan today is the most indebted advanced economy on Earth. Its government debt sits at around 250% of its entire economy, roughly double the United States, which itself is drowning in about 125% of debt to GDP.
So, let me ask you a question. How did Japan get away with this for so long and not go bust? And there's two reasons. First, in a sense, Japan was the bank to the world. You see, Japanese citizens and corporations are voracious savers. And for decades, they shipped those savings abroad. Its pension funds, its insurers, its banks. They bought up American treasuries, foreign bonds, and foreign companies by the trillions. For 34 years straight, Japan was the largest creditor nation on Earth. The country that the rest of the world owed the most money to. Now, it only lost that crown to Germany in 2024. or a bit of a foreshadowing event for those who are paying attention.
But I want you to hold that claim up next to the debt because this is the part that trips most people up. The Japanese people are savers and they are also some of the biggest buyers of their own government bonds. 250% debt to GDP is owed almost entirely at home, not to foreigners like US treasuries are. But you might be wondering how both of these things can be true at the same time. How can a government be this deep in debt to its own people while the country as a whole is still lending money to the rest of the world? How does that add up?
And the trick is that the government and its people are two completely different wallets. The Japanese people are some of the most disciplined savers on earth. Decades of selling products like cars, electronics, and machinery to the world have built a mountain of savings. And that mountain is big enough to do two jobs at once, fund much of what the Japanese government borrows, and still leave enough left over to lend abroad. So the government leans on its people, and the people, even after bankrolling their own government, still have money left over to be the world's lender.
Now, that works for exactly as long as the savings pile stays big enough to do both jobs. But the closure of the straight of Hormuz is the first thing in a generation big enough to drain that pile. Now, an oil shock and a falling currency are a vice. Every time the yen drops, Japan's oil bill gets bigger in yen, which forces it to sell even more yen to cover the next purchase. And every yen it sells drives the currency down another notch, which makes the next bill bigger still. Are you with me? Cuz this is the doom loop. weaker yen, higher oil bill. More yen selling to buy more oil creates an even weaker yen and therefore an even higher oil bill next time. It doesn't need a fresh shock at this point to keep getting worse. It feeds on itself round and round tighter and tighter.
Now, you already know who Japan's government borrows from, its own people and its own central bank. And that part is important. Now, for years, this worked because the Bank of Japan acted as the buyer of last resort. If private savers would not buy enough government bonds, the Japanese central bank would step in and print yen and buy them instead. So, there was always a buyer for Japanese debt, and that kept borrowing costs near zero. But the central bank cannot keep that promise any longer. Printing more yen to prop up the bond market would drive the yen lower and the oil bill higher, the exact spiral we just talked about. So, it's stepping back. And the moment that guarantee is gone, lenders want a real return again. And the price Japan pays to borrow is now climbing to levels the country has not seen in a generation. A currency that is falling and a borrowing cost that is rising at the same time. That is the classic signature of a country losing the confidence of its lenders. It is a thing that normally happens to fragile emerging markets, but it's now happening to the third largest economy in the world.
When the canary needs cash, the first thing it reaches for is the most liquid thing it owns. In this case, that's US treasuries. And the selling has already started. In the first 3 months of this year, Japanese investors dumped about 29.6 billion of US bonds, their largest exit in nearly 4 years. We talked about this exact mechanism in both two wars and the first domino. Two other videos we published this month. The links are probably below, but what we discussed is now happening in Tokyo.
Now, let me explain the one piece of plumbing that connects a problem in Tokyo to the balance in your brokerage account. It has a name, and the name is the yen carry trade. And almost nobody outside of finance understands what it is, but it's actually very simple. And by the end of this section, you will understand exactly how important this is. The carry trade is simple. Borrow in the cheapest currency on Earth. Convert it to a stronger currency and buy assets that pay more than your borrowing cost. For decades, that meant borrowing yen at nearly zero. Converting them into dollars and buying American treasuries, tech stocks, real estate, corporate bonds, anything with a return. And the profit was the spread. Think of it like borrowing money from a relative who charges you no interest and then lending that money to a friend at 5%. It's the easiest money in the world. So you do it with as much borrowed cash as you can get your hands on. That is the carry trade stacked up over 30 years and trillions of dollars. Cheap Japanese money quietly poured into nearly every market on the planet helping hold them up.
But here's the catch. It only works while the yen stays cheap. The day Japanese interest rates climb, the math flips and that free loan suddenly costs real money. And everybody who took it would be in a rush to unwind the trade at the exact same time. Sell the stocks, sell the bonds, and pay back the yen. Now, when that money gets pulled from international markets and sent back to Japan, every market it was holding up feels the floor drop at the exact same moment.
Now, nobody can say exactly how big this trade is. It depends on what you count. Direct borrowing, swaps, derivatives, hidden currency exposure. Estimates range from the low trillions to far higher. But the point is not the number. The point is that nobody knows the true size because the trade is scattered through private contracts across the global financial system. It's not one thing in one place. It's millions of separate bets made by hedge funds, banks, and companies scattered across dozens of countries. And much of it sits in private currency contracts that never show up on anybody's books. There is no central registry, no ledger, nobody is keeping count.
Now, if that sounds like a reach, stay with me because this is not theory. We actually saw a trailer to this event in August of 2024. The Bank of Japan raised its interest rate by one quarter of 1%, the smallest move it could possibly make. And that alone was enough. The carry trade began to unwind. And the damage did not stay in Tokyo. Now, Japan's market fell 12.4% in a day, its worst day since 1987. But within hours, it was Wall Street's problem. The S&P 500 had its worst day in two years and the market's fear gauge spiked to one of the highest readings ever recorded. From soul to New York, from gold to crypto, markets fell together in the same hour for the same reason.
Now sit with a proportion of that. Japan chose to raise rates one quarter of 1%. And the tremor circled the globe in an afternoon. That was the gentlest tap anybody could have given it. But the next move might not be so gentle because the next move might not be Japan's choice. Last week, I laid out the choices in front of Kevin Worsh, the incoming American Federal Reserve chairman. Now, when he takes the seat, he's going to be faced with two choices. He can save the US dollar by raising the interest rate, but at the cost of crushing the American economy. Or he can save the bond market by printing money, buying America's own debt, and quietly destroy the currency.
Now, Wars will choose door number two. He will save the bond market and slowly destroy the purchasing power of the US dollar because that's what every central banker would do in that scenario when facing a slow death or a fast death. They'll choose the slow death. But Japan can show us what happens when you choose that door too many times and for too long. Japan's yields are now rising, but its currency is falling at the same time. To defend the yen, Japan must raise rates but into a mountain of debt. To defend the bond market, Japan must print yen, but into an energy shock, and it might go bankrupt trying to buy oil. One path breaks the treasury, the other breaks the currency. It's the same trap, the same choice, the same rule we ended on last week. When forced to choose, every central bank picks the slow death of the currency over the fast death of the economy.
There is one very important difference between Tokyo and Washington and this changes everything. America has cushions that Japan does not. It has the world's reserve currency. It has the deepest most trusted bond market on Earth and those things buy it time. Japan has none of that. It has a debt load near 250% of its economy, an energy bill it cannot pay with a falling currency, and creditors growing restless right now. Japan does not get to wait for the bond market to force its hand. It's being forced on its own. And because investors around the world have borrowed cheap yen for decades to buy assets elsewhere, Japan's choice does not stay inside Japan. It's going to hit everywhere all at once. And that is how a crisis in Tokyo becomes selling pressure everywhere else.
So every tool the US Federal Reserve now reaches for, Japan reached for first. Zero rates, money printing, a central bank buying its own government's debt to keep the lights on. America did not invent that playbook. It imported it from Tokyo a decade later. But look at where 30 years of that playbook left Japan. A government buried under debt worth two and a half times the entire economy so deep it can never raise interest rates again without blowing itself up. A generation of savers who earned almost nothing on their money for three decades. An economy that has barely grown since the 1990s. And now the final stage, a currency sliding into 40-year lows and a central bank trapped unable to defend it. That is the destination.
So here is America's odometer past 125% debt to GDP and climbing $39 trillion of debt and counting. The same zero rates and money printing already run an interest bill alone that now tops a trillion dollars per year. America is not standing at the start of this road. It's already halfway down it. So when you want to know what the back half looks like, a government that can never stop printing because stopping would break it. Savers with nowhere safe to earn a real return. A currency leaking value while the price of everything imported creeps up. The people who own hard assets are pulling away from those who don't. You don't have to imagine it. You can watch it live in Tokyo. And don't take comfort in being different. Japan thought it was exceptional, too. In 1989, when its market was the envy of the world, and the dirt under its palace was worth more than the state of California. Exceptional is what every country believes right up until the gas reaches it. Japan is the canary. Same shaft, same gas, just a faster metabolism. It is absorbing the poison the rest of us cannot feel yet. And it is showing the symptoms first. The bird has stopped singing. So position not for the world as it was, but for the world that is arriving. The slow death is brutal for cash and for paper promises. But it's very kind to real things like energy, hard assets, gold, the boring stuff that I keep speaking and writing about. The things that don't need cheap money to survive. Now, why is that? Because when governments solve debt problems by weakening money, the things priced in that money tend to rise. Not because they changed, but because the measuring stick shrank. That old rule in the coal mine, it still stands. When the canary stops singing, head for the exit.
Honest question, what am I missing? Let me know in the comments. If you enjoy my content, this is the J. Martin Show. We publish here every single week. Please let me know what you think in the comments. Hit subscribe, hit like, but most importantly, share this video with a friend, somebody that you think needs to see it. And if you want to see the prequels to this piece, check out Two Wars and the First Domino. I'll see you next week.