The Easy Knowledge Blog

Bond Yields at a 30-Year High, the Yen at a 39-Year Low — What Japan’s Fiscal and Currency Warning Signs Mean for Korea’s Economy

🎧 Post Summary

You’ve probably heard it at currency exchange counters or in travel forums lately: “the yen is really cheap.” Indeed, the won-yen exchange rate briefly dropped to around 890 won per 100 yen, and the dollar-yen rate hit its lowest level in 39 years since 1986. But dig into the roots of this weak yen, and it’s not just a currency fluctuation — it reflects the market’s growing doubts about the soundness of Japan’s public finances. Today, we’ll walk through why Japan’s national debt has ballooned, why the weak yen won’t seem to stop, and what this all means for Korea’s economy and your wallet.

① Just How Serious Is Japan’s National Debt?

According to data released by Japan’s Ministry of Finance on the 10th, the central government’s debt — combining government bonds, borrowings, and government short-term securities — reached a record 1,346.6833 trillion yen at the end of June, up 2.8407 trillion yen from the end of March. Of that, outstanding government bonds totaled 1,211.7466 trillion yen, with regular government bonds accounting for 1,110.8839 trillion yen. The Ministry’s “Debt Management Report 2026” projects the balance of bonds and borrowings will reach approximately 1,493 trillion yen by the end of this fiscal year (April 2026 to March 2027) — meaning Japan is effectively on the cusp of a 1,500-trillion-yen national debt era.

The picture is even starker when measured against GDP. By 2026 general government gross debt figures compiled by market research firms, Japan’s ratio stands at roughly 200%, the highest in the world. Back before the bubble burst in the early 1990s, Japan’s debt-to-GDP ratio was just 40–50%; it first crossed 100% in 2002 and topped 200% in 2011. That said, it’s worth noting that most of Japan’s government bonds are denominated in its own currency and held domestically by Japanese investors and the Bank of Japan itself — a structure that differs from debt crises like those in Greece or Argentina.

The trouble is that government spending keeps rising alongside surging social security costs driven by a shrinking birth rate and an aging population — and as interest rates climb too, the burden of servicing that debt is snowballing. The higher borrowing costs go on newly issued bonds or bonds rolled over at maturity, the greater the government’s interest burden becomes, with a lag.

② The Takaichi Government’s Expansionary Fiscal Policy and the “Honebuto Shock”

What delivered the decisive blow to bond yields this year was the draft “Basic Policy on Economic and Fiscal Management and Reform” — known as the “Honebuto” policy — unveiled by the Takaichi cabinet in late June. Japanese media have dubbed the fallout the “Honebuto Shock.” The draft dropped the phrase “fiscal consolidation” that had appeared in previous years’ versions, and instead laid out plans for an additional 10 trillion yen in annual spending starting in fiscal 2027. In the aftermath, the 10-year government bond yield briefly spiked to between 2.85% and 2.93%, its highest level since 1996 — roughly 30 years.

The Takaichi cabinet is also pushing a tax cut to address high prices and weak consumption: lowering the consumption tax on food from the current 8% to 1% for two years starting next spring. Securing the roughly 5 trillion yen needed annually to fund it remains an unresolved challenge, and even within the ruling Liberal Democratic Party, there’s pushback that the move “could undermine social security funding and erode market confidence in Japan’s finances and currency.” Indeed, in a Mainichi Shimbun poll, support for the Takaichi government fell 10 points in a single month, from 51% to 41%.

Reuters, citing financial analyst Hiroyuki Kubota, warned that “the 2022 UK ‘Truss crisis’ — where an unfunded tax-cut plan sent gilts and the pound tumbling — could be repeated in Japan.” The concern is that if Prime Minister Takaichi loses market confidence, her room to maneuver on policy could narrow sharply. Against that backdrop, Takaichi reportedly asked Bank of Japan Governor Kazuo Ueda to have the central bank buy additional government bonds “if necessary” to curb rising long-term rates — a scene that puts the government’s expansionary fiscal stance on a direct collision course with the central bank’s move toward monetary policy normalization.

③ The Reality of the Super-Weak Yen — How Far Has the Exchange Rate Fallen?

The dollar-yen rate briefly touched the 162-yen range in late June, its weakest level in about 39 years and 6 months since December 1986. The weakness continued, and on July 21 the rate broke past 163 yen, setting a fresh 39-year-7-month low. Below is a look at the exchange rate’s movement over the past two months, based on reported figures at key points in time.

The Bank of Japan raised its policy rate by 0.25 percentage points to 1.0% in June — the highest level since September 1995, roughly 31 years. But with the U.S. policy rate still far higher (3.50%–3.75%), the gap between the two remained wide, and the rate hike alone wasn’t enough to rein in the weak yen. Late last month, U.S. and Japanese monetary authorities jointly intervened in the foreign exchange market for the first time since 1998, briefly pushing the dollar-yen rate down to 155. Since then, though, it has rebounded, standing at 159.39 as of August 18 — back near the 160 level widely seen as a psychological resistance line.

This is where the Bank of Japan’s dilemma deepens. Preliminary data released on the 17th showed Japan’s real GDP for the April–June quarter grew just 0.3% quarter-on-quarter, or 1.1% annualized — well below the roughly 2% annualized growth the market had expected. Both personal consumption and capital investment declined, turning domestic demand’s contribution to growth negative. Raising rates would help defend the yen, but it risks dealing a further blow to an already-fragile domestic economy — and caught in that dilemma, the Bank of Japan is facing skeptical market chatter that it’s “behind the curve” on policy.

④ Warnings From the Experts

• Robin Brooks (former Chief Economist, Institute of International Finance): Despite reassuring U.S. inflation data, long-term forward bond yields have surged across major economies, with Japan’s yield-curve distortion the worst among them. His diagnosis: bond markets are pricing in sovereign debt risk premiums more than they’re reflecting positive inflation news.
• Hiroyuki Kubota (financial analyst): Pointed to the UK’s 2022 “Truss crisis,” in which an unfunded, large-scale tax cut sent gilt and currency values plunging, warning that a similar crisis of market confidence could play out in Japan.
• Koji Yajima (Chief Fellow, NLI Research Institute): Noted that historically, yen strength following currency intervention has mostly proven temporary, and predicted the exchange rate will likely oscillate within a range as it seeks a new equilibrium. He also observed that a weak yen no longer drives Japanese stock gains the way it once did.
• Overseas hedge funds (cited by Nikkei): The prevailing view is that the Bank of Japan will need to raise rates at least twice more this year to reverse the yen’s slide.

⑤ The Impact on Korea’s Economy — Both a Blessing and a Burden

The super-weak yen is landing on Korea with two very different faces.

The immediately noticeable upside is travel and import prices. The won-yen cross rate briefly fell to 889.83 won per 100 yen in July, its lowest level in two years since July 2024. That’s fueled an explosion in demand for Japan travel — one outlet reported Japan travel bookings for July and August were up more than 50% year-on-year, with low-cost carriers racing to add new routes to destinations like Kobe, Sapporo, and Hakodate. In fact, roughly one in four foreign visitors to Japan in the first half of this year was Korean. Domestic companies that import raw materials, parts, and consumer goods from Japan are also benefiting from lower procurement costs.

For exporters, though, it’s a clear headwind. In sectors where Korea and Japan compete head-to-head globally — semiconductors, autos, steel — a weaker yen lowers the dollar-denominated price of Japanese goods, eroding the relative price competitiveness of Korean products. On top of that, some analysts note that a weakening yen often adds pressure on the won as well, creating a “double pressure” effect. That said, the won has recently shown strength of its own — buoyed by robust semiconductor exports and solid growth (Korea’s Q1 2026 GDP grew 1.8% quarter-on-quarter) — which has partially offset the impact of the weak yen, making the overall direction difficult to call definitively.

Past precedent offers some clues here. When the 1985 Plaza Accord sent the yen sharply higher, Japanese companies responded not by cutting prices but by pivoting toward R&D and future-business investment — a shift that ultimately reshaped Japanese manufacturing for the better. In today’s weak-yen environment, the pace of technology investment by companies in each country, more than the exchange rate itself, may prove to be the key variable shaping medium- to long-term industrial competitiveness.

Investor Notes

• Exchange rates are, for all practical purposes, impossible to predict with precision. Investment or currency-exchange decisions premised on confidently calling how long or how far the weak yen will run deserve a cautious approach.
• Assets tied to Japanese government bonds and the yen can react sharply, in the short term, to policy events such as Bank of Japan meetings or government intervention announcements.
• If your holdings or portfolio lean heavily on exporters in semiconductors, autos, or steel, it’s worth checking how won-yen exchange rate swings might affect their price competitiveness.
• Among those who follow the market, splitting currency exchange for Japan travel into several smaller transactions over time — rather than one lump sum — is commonly mentioned as an approach. That said, it’s no guarantee of which way the rate will move.

To sum up, today’s weak yen isn’t simply a currency losing value — it’s the product of Japan’s accumulated fiscal burden, the Takaichi government’s expansionary fiscal stance, and a Bank of Japan struggling to keep pace with it all. With the yen still failing to find its footing despite joint U.S.-Japan intervention, the market’s attention now turns to the Bank of Japan’s next policy meeting and how the Takaichi government plans to fund its tax cuts. For Korea, that means welcoming cheaper Japan travel and import prices with one hand, while grappling with weakened export competitiveness with the other. It’s worth keeping an eye on Bank of Japan headlines and the won-yen exchange rate in the days ahead.

References

• Money Today – “Bond Yields at 30-Year High… Bank of Japan’s Rate-Hike Dilemma to Fight the Weak Yen” (mt.co.kr)
• Hankyung (Korea Economic Daily) – “Bond Yields Hit 30-Year High… BOJ Caught in Rate-Hike Dilemma” (hankyung.com)
• Financial News – “Takaichi Asks BOJ Governor to ‘Buy More Bonds’… U.S. Pressures Japan to ‘Raise Rates’” (fnnews.com)
• Etoday – “Takaichi’s Expansionary Fiscal Policy Sends Japanese Bond Values Tumbling… Yields at 30-Year High” (etoday.co.kr)
• Global Economic – “Long-Term Rates Surge Despite Cooling U.S. Inflation… Warning Signs of a Japan-Originated Debt Crisis” (g-enews.com)
• Yonhap News – “Won-Yen Rate Falls Below 900… Lowest in 1 Year and 8 Months” (yna.co.kr)
• MS Today – “Japan’s 1,346-Trillion-Yen Debt Pile Meets Tax Cuts… Fiscal Warning Signs” (mstoday.co.kr)