What If Your Neighbour’s Mortgage Set Your Own Bills

Imagine a family living in a modest yet well-maintained home in a Tokyo suburb, let’s call them the Yamamotos. For years, they have managed to get by with budgeting and some creative borrowing. Their house isn’t fancy, but it’s stable. They’ve raised kids, taken care of ageing parents, and despite a mountain of loans, they’ve managed to keep the lights on.

But they live in a strange kind of neighbourhood. One where the mortgage payments of the Jefferson family, two streets over, have the power to drive up their own bills. If the Jeffersons' mortgage rate spikes, the Yamamotos’ rent goes up, their groceries cost more, and their loan repayments suddenly look terrifying. If Jefferson's mortgage rates fall, things ease up again. The Yamamotos' financial fate swings not with their own choices, but with those of their US neighbours, the Jeffersons.

This, in a nutshell, is what it’s like for Japan.

The Jeffersons' mortgage in this story is America’s interest rate, the price the US pays to borrow money. And because the US is the biggest, loudest house on the block, every move it makes changes the rules for everyone else. When US rates rise, investors pull their money out of places like Japan to chase higher returns in the States. That weakens the yen, makes imports more expensive, and drives up the cost of borrowing at home. But when US rates fall, some of that money flows back, easing pressure and giving Japan a bit of breathing room. And if Japan raises rates at the same time as the US lowers them, a bit more money might come back on top of that.

It’s a bizarre setup, one that few outside the financial world talk about, but that quietly governs how much Japan pays to run its country. For decades, Japan has been able to live with a staggering level of debt, the highest in the developed world. Around 260% of its annual economic output is owed, a number so large it’s easy to ignore, like the national debt equivalent of climate change: real, abstract, and easy to deny until something breaks. The reason it hasn’t broken yet is that borrowing has been cheap. Japan has been living in an era of ultra-low interest rates for over two decades. That’s like having a giant credit card bill but only needing to pay pennies in interest each month. As long as rates stayed low, Japan could roll over its debt without panic. But times are changing.

Inflation has returned to the global stage, and the US Federal Reserve has responded with aggressive rate hikes. That puts upward pressure on rates everywhere. Suddenly, the financial conditions that allowed Japan to borrow endlessly without consequence are slipping away. And the markets, the people who actually buy Japanese government bonds, are starting to notice.

In May, a sale of long-term Japanese bonds fell embarrassingly flat. Investors weren’t biting. The government had to offer better terms to secure the necessary funds. Since then, other bond sales have seen similarly tepid demand. That’s a serious shift. If Japan can’t sell its debt as easily as before, it’s like the Yamamotos trying to refinance their mortgage only to be told they’re no longer a good bet. Why now, though? Japan’s debt problem isn’t new. So what’s changed?

A few things. One is that investors globally are less patient than they used to be. Since COVID, every major economy has borrowed more. That means Japan is now competing with a crowded field of debt-hungry nations, all trying to sell their bonds. And unlike in the pre-COVID era, inflation is no longer low and predictable. Higher inflation means investors demand higher returns, which means borrowing is no longer cheap, even for countries with long histories of stability.

Then there’s the political climate. Prime Minister Shigeru Ishiba recently resigned after a poor election showing. His on-the-record comments, warning that Japan’s finances were “worse than Greece”, may have been an attempt at tough love, but it rattled markets. Investors don’t like surprises. And with the ruling party now in an unstable coalition, any momentum toward fiscal discipline seems to be evaporating. At the same time, Japan’s central bank, the Bank of Japan, is trying to unwind two decades of emergency measures. It has been slowly reducing its massive purchases of government bonds, trying to return the economy to something like normal, gently. But each time it pulls back, bond yields rise. It’s like trying to ease off the accelerator without slamming the brakes, and discovering the car was being held together with tape and hope.

The heart of the issue is that Japan is stuck between a rock and a hard place. If it raises interest rates to match global trends, it risks making its debt unmanageable. However, if it keeps rates low, the yen continues to slide, inflation creeps in, and households start to suffer. It’s a lose-lose scenario, a choice between inflation at home or instability in the bond market. And all of it is made worse by decisions in the US. Trump’s trade policies are adding fresh chaos to global markets. Tariffs are driving up prices, and political pressure is being applied to the Federal Reserve, which is expected to lower interest rates soon. Ironically, that could make things worse, not better. If rate cuts are seen as political rather than economic, investors may lose confidence in the dollar, triggering volatility everywhere, including in Japan.

The trap Japan finds itself in, is this: it must respond to conditions it doesn’t control, driven by a country that can afford to break rules that Japan can’t. The US can run deficits and weather inflation because the dollar is the global reserve currency. Japan doesn’t have that luxury. The risks are no longer theoretical. The bond market is flashing warning signs. Demand is falling. Yields are rising. Investors are no longer automatically accepting Japan’s debt on faith alone. And if borrowing costs continue to rise, Japan faces a future where every yen it collects in taxes goes toward interest payments, not schools, hospitals, or infrastructure.

That’s the reality facing the Yamamotos. They’ve kept the lights on for years by carefully balancing their books and making the most of cheap borrowing. But for now, the neighbour’s mortgage is rising. And the bills are coming due.

This doesn’t mean collapse is imminent. Japan still has deep reserves of institutional credibility, strong industries, and plenty of time to course-correct. But time is no longer unlimited. The question is not whether Japan can afford to borrow; it’s whether the rest of the world is still willing to lend. And for a country that has built its entire financial model on the assumption that borrowing would always be cheap, that’s a much more uncomfortable question.

I write on LinkedIn about branding, marketing, and what it's really like doing business and living in Japan, beyond the sushi and cherry blossoms. Curious about entering the Japanese market without faceplanting? Visit my company: www.ulpa.jp

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