How severe is the current situation in Japan? Debt has soared to $10 trillion, while newly announced crop yields hit record highs—sounds like some dark humor. The central bank held an emergency meeting, but the market had already sniffed out the bad smell.

The core issue is that Japan's economy has survived these years mainly because interest rates have been kept near zero. That support is now gone. Once yields rise, the math becomes quite brutal: debt repayment costs skyrocket, government revenue is eroded by interest, and the entire system begins to creak and groan.

Any modern economy can only choose one: default, restructuring, or allowing inflation. There is no fourth way.

The real problem is not just Japan itself. Japan holds hundreds of billions of dollars in overseas assets, over $1 trillion of which are U.S. Treasuries. There are also hundreds of billions of dollars in stocks and bonds around the world. Their previous overseas investments were purely because—domestic yields in Japan had become so bad.

Now, Japanese bonds finally offer some real returns to investors. But what does that mean? After hedging U.S. Treasuries, it’s actually a losing trade for Japanese investors. This is not emotional volatility; it’s pure mathematics.

Capital will flow back. The withdrawal of hundreds of billions of dollars from global markets will not be a gentle process—it’s a liquidity black hole.

Add to that the factor of yen arbitrage trading. Over $1 trillion of cheap yen has been borrowed and poured into stocks, cryptocurrencies, emerging markets—basically anywhere that can generate interest. Once Japan raises interest rates, this arbitrage chain will start to loosen, and the consequences could be severe—only time will tell.