Japan’s debt problems are helping weaken its currency. The United States should pay attention.

The Japanese yen has weakened sharply this summer. It bottomed out in late July, trading at nearly 164 yen per U.S. dollar – the worst rate in 40 years. 

This is more than a headache for Tokyo currency traders. It’s a source of real financial risk for the U.S., and a warning about what happens when a country’s debt grows so large that it constrains its economic choices. 

Why the yen is weak – and what debt has to do with it 

A few factors are working against Japan right now.  

The first comes from Washington. The Federal Reserve’s benchmark interest rate is currently 3.5%–3.75%, compared to around 1% in Japan. That roughly 2.5 percentage-point gap gives investors a strong incentive to hold dollars and buy U.S. assets instead of holding yen and buying Japanese assets. 

So they sell yen, buy dollars, and move money abroad – weakening Japan’s currency. 

Higher oil prices have made matters worse. Japan is an energy importer – about 85% of its supply comes from the Middle East – and most international energy transactions are done in dollars. A weaker yen means Japan has to spend more to buy the same oil, gas, and other necessities – fueling inflation and squeezing household budgets. 

But Japan’s national debt is increasingly part of the story.  

As bad as America’s debt problems have been, Japan’s are worse. Japan’s national debt is more than twice the size of its entire economy – the third highest in the world, behind only Sudan and Taiwan. 

That makes it much harder for Japan’s central bank to help support the yen. Raising interest rates would strengthen the currency by making Japanese bonds more attractive, but it would also make it far more expensive for the government to finance its enormous debt.  

Reuters global markets columnist Jamie McGeever described Japan’s policy mix as a “doom loop.” The government is reluctant to raise taxes or cut spending, and the central bank is slow to raise interest rates. The result is that the debt will keep climbing and the yen will keep falling.  

Why the U.S. cares 

Japan is the largest foreign holder of U.S. debt, owning over $1 trillion in Treasuries as of May 2026. 

To support the yen, Tokyo may sell dollar assets, including Treasuries, to buy yen. Japanese banks and investors may also decide to invest more at home and less in the U.S., which could push U.S. borrowing costs higher as we lose our largest foreign customer base.  

That matters well beyond Washington. Treasury rates influence mortgages, car loans, business loans, and credit cards. When the federal government must pay more to borrow, so do American families and businesses. 

The reason is simple: Treasury rates are the building blocks of the lending economy. U.S. Treasuries are widely considered to be risk-free; investors are guaranteed their money back. Lending money to a business or homebuyer is riskier, so investors demand a higher interest rate than the Treasury offers. 

As Treasury rates climb, lenders demand even higher rates on other types of loans. 

The strategic stakes are just as important. A weak yen makes energy, weapons, advanced technology, and other dollar-priced imports more expensive for Japan. That can weaken the economic foundation of one of America’s most important allies in Asia at a time when China is becoming more aggressive. 

That helps explain why the U.S. has stepped in. Last week, the Treasury Department joined Japan in a rare coordinated intervention to buy yen, helping it rebound sharply from its lows.  

Treasury Secretary Scott Bessent has also said the United States will consider expanding a Federal Reserve facility that lets foreign central banks temporarily borrow dollars using Treasuries as collateral – reducing the need for Japan to conduct a fire sale of those assets. 

These steps can calm markets temporarily, but they cannot solve Japan’s underlying problem. 

A warning for America 

Earlier this year, No Labels published Nightmare on Main Street, a booklet about how a debt crisis could hit the U.S., what it would mean for everyday Americans, and why Congress needs to start acting now to address it.  

Japan is experiencing some of the warning signs No Labels laid out: debt pressures that affect bond markets, businesses, family budgets, and America’s position in the world. 

Japan is also proving that the national debt does not have to trigger an overnight default to become dangerous. It can instead narrow a country’s choices year after year. It can leave governments unable to raise rates, cut taxes, increase spending, or respond to a crisis without frightening markets. It can make a currency vulnerable. And it can turn problems abroad into larger problems at home. 

Getting America’s fiscal house in order would do more than reduce the risk of a crisis of our own making. It would strengthen the U.S. against the shocks coming from overseas – including the kind now unfolding in Japan. 

Washington should act before markets force its hand.