Japan today faces a highly complex economic equation, with sovereign debts estimated at around $9.8 trillion, which is double the size of its economy of $4.4 trillion, and about three times the total output of the African continent.
These debts are increasing at a rate of nearly two million dollars every minute, while their annual interest payments amount to about 220 billion dollars.
For more than thirty years, global markets assumed that Japanese debt was highly secure, supported by huge domestic savings and a zero interest rate policy.
However, rising inflation levels and the gradual move towards raising interest rates have reshuffled the cards and put the Japanese economy to an unprecedented test of confidence.
Raising interest rates… an expected decision with sensitive repercussions
Tarek Al-Rifai, CEO of Corum Research Center, explained during his interview on the Business with Lubna program on Sky News Arabia that the financial markets were expecting an interest rate hike of about 25 basis points to reach three-quarters of a percentage point, a move that is considered in principle to be supportive of the Japanese yen and the stock markets.
However, what the market has witnessed since the beginning of the previous week, especially the declines recorded on Monday, reflects that this decision was priced in in advance in investors' expectations.
He points out that the Bank of Japan was too late in taking the step of raising interest rates, in a belated attempt to control historically high inflation rates compared to what Japan is used to.
The yen's weakness: a long trajectory spanning more than a decade
From the perspective of the exchange rate, Al-Rifai points out that the weakness of the yen is not an emergency phenomenon, but rather a path that has been ongoing since 2011, characterized by continuity and sustainability over many years.
In contrast, Japanese stocks have seen a strong rise in recent years, particularly in the technology sector.
However, the current decline in this sector, whether in the United States or Japan, is not related – according to his analysis – to the weakness of the yen or to the monetary policy of the Bank of Japan, but rather to the dynamics of trading in technology stocks globally.
An economy burdened by debt and structural pressures
Al-Rifai believes that the overall picture of the Japanese economy has changed over the past years, as the country has long suffered from chronic economic weakness.
At the forefront of the challenges is the historic rise in sovereign debt, which ranges between 220 and 250 percent of GDP, levels unprecedented globally.
This burden has now become a source of pressure on the economy as a whole, amid fundamental questions about the ability of the central bank and the Japanese government to control or reduce this ratio.
The roots of the crisis: zero interest rate policy
Al-Rifai goes back to the roots of Japanese monetary policy, recalling that Japan began lowering interest rates to zero in 1999, and then later tried to get out of this policy and return to normal levels above zero, and perhaps above 1 or 2 percent.
However, these attempts failed in 2001, and Japan returned to a zero interest rate policy, and even a negative one, between 2016 and 2024. He asserts that this stage put Japan in a “narrow corner” from which it has not been able to get out to this day.
The cost of debt: the most sensitive factor
Al-Rifai points out that any increase in interest rates, even a limited one, puts severe pressure on the interest costs that the Japanese government and companies pay to investors.
This explains the negative market reactions to any monetary tightening. Conversely, the zero interest rate policy of recent years has helped keep debt servicing costs relatively low, relative to the size of the debt itself, unlike what some European countries experienced when their debt levels rose.
Investor hesitation and breaking the closed loop
Since last year, as Japan began adjusting its monetary policy and moving closer to “normal” interest rates, investors have started to show an increasing degree of hesitation.
Al-Rifai believes that the cost of debt is likely to rise in the long term, which will dampen investment appetite. Furthermore, investor confidence, particularly among global investors who rely on the yen in carry trade strategies, has become a crucial factor, given the growing sense that Japan is trapped in a vicious cycle.
Loss of trust: the core of the crisis
Al-Rifai cites the first interest rate hike in March 2024, explaining that the main motivation was the sharp decline in the yen's exchange rate against the dollar, reaching about 150 yen to the dollar, a level not seen in Japan for about 25 years, in addition to inflation rising above 3 percent.
Although raising interest rates is supposed to support the yen and stocks, the continued weakness of the currency reflects, according to Al-Rifai, the fundamental reason for the crisis: the loss of investor confidence in the ability of the central bank and the Japanese government to address the existing debt crisis.
Tarek Al-Rifai’s analysis reveals an economy facing deep structural constraints, where a troubled monetary policy intersects with a historic debt burden and eroding investor confidence.
While Japan is trying to adjust its monetary policy, the challenges remain greater than just a gradual increase in interest rates, given a delicate equation that makes any reform step fraught with broad repercussions for the currency, markets, and the economy as a whole.
