Japan's Debt Burden Weighs on Yen as Investors Demand Higher Risk Premiums

Japan's public debt has become a major concern for its currency, the yen. According to Rabobank strategists, the country's gross government debt exceeds 200% of its GDP, making it the highest among advanced economies. This structural burden creates a persistent vulnerability for the yen, as investors demand a risk premium for holding Japanese assets.

Rabobank notes that while the Bank of Japan's policy shifts may offer some support, the sheer scale of debt issuance and associated interest costs could undermine confidence over the medium term. The bank emphasizes fiscal sustainability concerns as a key factor shaping the outlook for the yen, alongside monetary policy divergence and global risk sentiment.

The yen has been under pressure for much of the past year, driven by the wide interest rate differential between Japan and the US. However, Rabobank's focus on debt concerns adds a longer-term dimension to the currency's outlook, suggesting that even if the BOJ raises rates, the yen's appreciation may be limited without credible fiscal consolidation.