Japan’s Fiscal Doom Loop: Why the Japanese Will Flee to the Dollar

In the late 1970s and early 1980s, the American financial system experienced a seismic shift that few saw coming. Regulation Q had capped bank deposit rates at 5.25%, but inflation pushed market interest rates above 15%. Money market mutual funds emerged to fill the gap, offering savers direct access to market rates that their banks were legally prohibited from matching. The result was widespread disintermediation as deposits fled banks, the savings and loan industry collapsed, and hundreds of institutions failed. By 1980, money market funds held $77 billion; by decade’s end, they had fundamentally reshaped American finance.

Japan is about to experience its own version of this disintermediation, but with even more dramatic consequences. The catalyst isn’t money market funds, it’s stablecoins and the structural vulnerabilities in Japan’s financial system make the 1980s American experience look like a dress rehearsal.

The conventional wisdom on Japan’s fiscal future assumes a reassuring narrative: when crisis arrives, wealthy Japanese households and institutions will repatriate their foreign assets and buy Japanese Government Bonds, stabilizing yields and saving the system. After all, Japan’s $7.1 trillion in cash and deposits, and $20 trillion in wealth ($11.6 trillion held by the wealthiest 10%) represents an enormous pool of domestic capital that could, in theory, absorb a considerable amount of government debt. Japanese households hold roughly 50% of their financial assets in cash and deposits, compared to just 13% in the United States.

This is a massive cash hoard that most assume will rotate into Japanese Government Bonds that now have a yield, but that assumption is wrong. Not only will wealthy Japanese not do that, but they will also rationally increase their foreign dollar holdings as Japan’s crisis unfolds. Understanding why requires examining three converging forces: Prime Minister Takaichi’s stimulative fiscal agenda, the Bank of Japan’s commitment to tapering bond purchases, and the emergence of regulated stablecoins offering yields 40-50 times higher than Japanese bank deposits.

The Absorption Gap No One Wants to Discuss

Japan’s debt arithmetic has reached a breaking point. Government debt stands at $8.35 trillion, representing 236.7% of GDP. Annual debt service consumes 25% of tax revenue, and structural deficits, driven primarily by social security obligations total 10-11% of GDP before any discretionary spending.

For years, the Bank of Japan masked this fiscal deterioration by purchasing government bonds at a pace that exceeded new issuance. At its peak, the BoJ bought $500 billion annually, absorbing not just new bonds but refinancings as well. The BoJ now holds $3.3 trillion in JGBs—50% of all outstanding government debt.

This arrangement is ending. The BoJ has committed to tapering purchases from $500 billion to $200-250 billion by 2026, declining toward zero by decade’s end. Governor Ueda justified the taper based on inflation returning to target and the need for “exit from monetary easing.”

Simultaneously, Prime Minister Takaichi’s growth-oriented fiscal policy is expanding government borrowing. Her agenda includes cutting food sales tax to zero, increasing defense spending by $30-45 billion over five years, expanding infrastructure investment, and providing $65-95 billion in inflation relief transfers. New JGB issuance will rise from $190 billion to $220-250 billion annually.

The mathematics are unforgiving. With the BoJ stepping back and the government borrowing more, private investors must absorb $725-825 billion annually compared to historical private absorption of $125-250 billion. This gap can only close through sharply higher yields.

The Stablecoin Accelerant: 1980s America, Turbocharged

The parallels to America’s 1980s disintermediation are striking, but the yield differentials are far more extreme. Under Regulation Q, American savers were losing out on roughly 10 percentage points of yield (15% market rates versus 5.25% deposit caps). Japanese savers today face a gap of 50-100x.

Japanese bank deposits currently yield 0.01-0.10%. USD stablecoins on platforms like Coinbase and Kraken offer 4.25-5.10%. This isn’t a marginal difference that sophisticated analysis might justify ignoring for convenience. It’s an economic absurdity that demands reallocation.

For context, Japan’s famous carry trade of the 2000s-2010s was built on borrowing yen at 0.5% to invest in higher-yielding assets, a 3-5x differential. Stablecoins offer 10-50x differentials with superior regulatory clarity.

Japan has already approved the regulatory framework. The Payment Services Act amendments established a stablecoin framework in 2023. JPYC was approved as Japan’s first yen-pegged stablecoin in October 2024. USDC launched via SBI VC Trade for Japanese retail in April 2025. When products receive explicit government regulatory approval, Japanese consumers treat them as officially sanctioned rather than speculative, just as American savers in the 1980s viewed money market funds as legitimate alternatives once their yields became undeniable.

Now imagine LINE, Japan’s dominant messaging app with 95 million users, integrating USDC: “Convert your bank deposit to USDC, earn 5% automatically.” One tap in the app. Based on LINE’s historical adoption rates for financial services (10-20% within 6-12 months), that could translate to $95 billion migrating from bank deposits almost immediately. Add Rakuten’s 100+ million users and PayPay’s 95 million users, and deposit flight of $300-600+ billion over 24 months becomes plausible.

Banks losing deposits must sell JGBs to maintain liquidity, adding $250-500 billion in additional supply pressure. The doom loop accelerates, exactly as it did when American S&Ls lost their deposit bases and were forced to liquidate assets at fire-sale prices.

Why Repatriation Won’t Happen

Japan’s top 10% households include the country’s most financially sophisticated investors: executives, entrepreneurs, and professionals managing substantial wealth. They understand the fiscal mathematics. They know yields must rise from 2.24% to 4-6% to clear markets. And they recognize that repatriating US assets now would be selling low and buying high.

The timing argument alone is decisive. If you believe Japanese yields must rise from 2.24% to 4.5%, the rational move is to buy JGBs after the yield spike when prices are low, not before. Repatriating now means purchasing bonds just before they decline in value. Wealthy investors aren’t going to make this error.

Modern portfolio theory suggests Japanese investors should hold 30-50% of financial assets in foreign currency-denominated securities. Currently, the top 10% hold only 7.6-8.7% in foreign assets, far below optimal levels. Rather than repatriate existing US assets, wealthy Japanese are likely to continue increasing foreign allocation to reach appropriate diversification.

The yield comparison seals the case. Unhedged US Treasury returns (4.5% yield plus 8% annual yen depreciation at 2025 pace) deliver 12.5% annually versus 2-4.5% for Japanese alternatives. Even hedged, US Treasuries remain competitive. Add stablecoin opportunities offering 5-15% yields in dollars, and the mathematics overwhelmingly favor holding or increasing USD exposure.

Institutional constraints reinforce this reality. Life insurance companies face solvency constraints that prevent increasing JGB exposure. GPIF, the world’s largest pension fund, is legally near its maximum domestic bond allocation. Banks are forced sellers due to deposit flight, not buyers. There is simply no institutional constituency available to support Japanese bond markets.

Three Paths Forward—All Painful

Given that wealthy investors will not repatriate and stablecoin disintermediation will accelerate, Japan faces one of three outcomes.

The most likely scenario is financial repression. JGB yields spike to 4-5%, debt service becomes unsustainable, and the BoJ is forced to resume massive purchases. Yield curve control gets reimposed. The yen depreciates from 158/USD to 180-200/USD. Inflation accelerates via import pass-through. Real wages decline 2-3% annually. Over a decade, households holding domestic assets lose 15-40% of real purchasing power, while those with foreign dollar exposure maintain their wealth.

If the BoJ refuses to resume quantitative easing to maintain credibility, Japan faces an acute fiscal crisis. Yields spike to 6-8%, banks face solvency crises from mark-to-market losses, and the government is forced into emergency consolidation, cutting social security, raising taxes dramatically, or explicitly restructuring debt.

The third possibility, a full debt restructuring with currency reset, seems unthinkable until it suddenly isn’t. Japan’s political institutions have strong constraints against explicit default, but mathematical impossibility eventually overwhelms institutional resistance.

The Investment Implication

In none of these scenarios do wealthy investors repatriate US assets. In all scenarios, rational investors increase foreign diversification or USD stablecoin exposure as the best protection against Japanese fiscal instability.

The central thesis holds: Japan’s capital flows are out, not in. The conventional expectation that Japanese money will flood back to stabilize domestic markets misunderstands both the incentive structure facing wealthy investors and the new opportunities stablecoins provide for accessing dollar-denominated yields.

The 1980s American experience proved that when savers can access market-rate yields outside the banking system, they will, regardless of regulatory intent or institutional preferences. Japan’s stablecoin moment will prove the same principle, but with yield differentials that make the American experience look modest by comparison.

For investors positioned in dollar assets, whether US Treasuries, dollar stablecoins, or USD-denominated equities, Japan’s fiscal deterioration represents an asymmetric tailwind. The yen weakens, the dollar strengthens, and those who understood the doom loop dynamics early will have preserved and grown their wealth while those relying on domestic Japanese assets watch their purchasing power erode.

The wealthy Japanese see this clearly. They’re not going to be the last ones off a sinking ship. They’re already heading for the lifeboats, and the lifeboats are denominated in dollars.