US and Japan Face Debt Abyss as Interest Rates Rise

The US and Japan are facing a potentially disastrous situation as their massive public debt levels begin to clash with rising interest rates.

The International Monetary Fund forecasts that the US will have general government gross debt of around 126% of GDP by 2026, while Japan's debt is expected to exceed 230% of GDP. While this may not seem alarming on its own, the problem lies in the relationship between these numbers and interest rates.

Rising bond yields can create severe fiscal strain for both countries, especially when their massive public debt levels are taken into account. In Japan's case, the Bank of Japan has raised its benchmark rate to 1%, but this move could escalate the servicing costs of a massive public debt.

The situation is further complicated by the fact that Japanese investors have played a significant role in international bond markets for decades, and their repatriation to the domestic market could impact global demand for American sovereign paper.