Bond yields in western countries have reached their highest level since the last time everything fell apart. US 30-year treasury yields reached a high of 5.18% in May 2026, the highest since July 2007. French 30-year bond-yields as well as Japanese 30-year bond yields have joined the party, peaking at 4.55% and 4.16% respectively.
In this context, debt crises, or the inkling of one, have become the norm. Japan should be the first in line, with its debt-to-GDP ratio currently around 230%, the highest among OECD countries. A number that anywhere else, would have the IMF on the first flight to the capital. And yet. No crisis. No freefall. Bond yields have remained extremely low over the decades. Striking a puzzle in public finance.
A World Before Bond Vigilantes
To start to understand this conundrum. It's quite necessary to step back from the current dogma of central bank independence and market financing of public debt. Some post-war economies did something altogether different.
In France, the "Circuit du Trésor", the successor of wartime interventionist economics, increased the ways in which the French government could fund its fiscal policy.
The financing of the French Treasury by the BdF was commonplace from the post-war period up until 1973. The BdF used official central bank loans, but it also used very specific and unofficial mechanisms (guaranteed bonds and CDC construction loans). This allowed for greater flexibility for the French government, especially when credit was restricted. At the same time,
this arrangement did not mean a free lunch, as the BdF restricted the expansion of public debt through anti-inflationary policies.
In fact, the French government was in constant surplus from 1958 until the end of this arrangement.(1)
In Japan, during the same time period, a different but just as unconventional way of obtaining funding for fiscal policy was in place. To finance most government investments, the government itself did not borrow. Instead, the Financial Investment and Loan Program (FILP) did the borrowing. And it did from a surprising source: the Postal Service. With its unparalleled number of branches and its inherent trustworthiness, households deposited en masse, and the government made sure of it. It capped interest rates on commercial bank deposits accounts in 1947, making the Post Office, with their slightly higher rates and no-penalty deposit accounts, the only real player in town.
Roughly 40 to 50% of the FILP's funding came from these deposits up until the 2000s. The FILP then took that money and handed it out as low-interest, long-term loans to finance government investment across the economy.
By 1997 its loan portfolio equalled 107% of GDP, supplementing lacking tax revenues and capital reserves to drive Japan's postwar growth, while keeping a balanced budget.(2)
The Triumph of Market Logic
In 1973 as France was gripped by the oil shock and inflation rose above 10%, the wind changed course for good and reforms were passed. BdF loans to the treasury started their irreversible decline, and at the same time, marketable public debt as a share of French public debt began to rise. The reforms aimed at greater transparency and deflecting criticism that BdF loans were fuelling inflation, curtailing the unofficial financing mechanisms available to the Treasury. The end came in 1993, when the financing of the Treasury via central bank loans was abolished outright. France decided to play by market rules.(3)
Japan held on for longer. The oil shocks didn't kill the FILP. The asset bubble bursting in the early 1990s didn't kill it either. What finally dismantled the system was the accumulated criticisms and the political push towards market principles and so, structural reforms followed in 2001. Postal savings were cut loose, meaning the FILP would now raise its funds by issuing bonds like everyone else. By 2007 the postal savings bank itself was privatized. From 1997 to 2012, the funding from postal savings deposits through FILP declined from 46% of GDP to only 1% of GDP.(4)
Two countries. Two systems. Two different timelines. Same ending. Liberalism had made the rules, and everyone had learned, in due time, to play by them. Or so it seemed.
The Great Workaround
Japan has a few macro problems. Japan is in the very late stages of its demographic transition with a declining population since 2010. Combined with economic growth that has been on life support since the asset bubble burst, the annual social security deficit and the primary deficit have had only one way to go, and that is up.
The capital-market liberalisation reforms, financial market deregulation and the abandonment of the FILP, implied that Japan was ready to play by market principles. It didn't. Instead, it came up with a new strategy to replace the FILP and address its structural issues without implementing austerity.
First, the Bank of Japan (BoJ) stepped in to fill the void. Through quantitative easing and yield curve control, it became Japan's primary creditor, holding more than half of all outstanding JGBs by 2023. Domestic banks retreated to around 10%, swapping their JGB holdings for central bank reserves, transferring duration risk to the BoJ and effectively insulating borrowing costs from market pressure.
Second, it replaced domestic returns with international returns. As the social security deficit ballooned from 4.1% of GDP in 1998 to a peak of 9.4% in 2011, and primary deficits compounded, domestic returns, which the FILP had depended on, were not enough to counteract the mounting deficit. The Japanese government chose in consequence to become a sovereign wealth fund.(5)
Borrowing in yen at near-zero rates, it invested into foreign equities and bonds, running the world's largest carry trade.
Inventing A New Balance Sheet
Becoming a sovereign wealth fund via a carry trade, as Chien, Du and Lustig argue, implied a "gamble for resurrection": going in highly leveraged and facing substantial risk in the hopes of higher returns. Going all in has meant an increase in the Japanese government's exposure to equities by 100% since 2012 and its exposure to risky assets by more than double (5), pushing public debt up by 125% since 1997 and past 200% of GDP by 2013.
And as in a gambler's dream, Japan got lucky. Asset prices have been on an unstoppable march upwards (no matter what has been thrown at them, including the current energy crisis), meaning the Japanese government made the juiciest returns possible. Add to this a stagnating economy with an inflation rate near 0 from 2001 to 2021, and you have a recipe for even negative interest rates. To top it all off, you have the yen, which has lost more than 50% of its value since 2012. The carry-trade has been so profitable in fact that the number that actually matters, net public debt, has gone down from 118% of GDP in 2012 to 77% of GDP in 2026.
The deeper point isn't whether Japan makes the hedge fund strategy last. It's what Japan continues to prove.
Who gets to write the rules
The conditions that make the sovereign wealth fund strategy work are quietly unwinding. Inflation in Japan in 2025 was equal to 3.2%, eating away at the exchange rate gains. And, as its elderly population is projected to increase, consuming more and producing less overall, there is no reason to believe that deflation will return, on the contrary. This inflationary future has forced the BoJ to start increasing interest rates, and every basis point it concedes makes the carry trade that much harder and risks appreciating the yen. The gamble isn't over, but the odds have shifted.
Fiscal consolidation is a political choice.
For most of the postwar era, France and Japan treated finance as a matter of democratic debate. Decisions were made through political institutions that could, at least in principle and indirectly, be held accountable by voters. The rediscovery of market-based finance transferred the decision-making to the hands of private actors. Yet Japan never entirely handed over the keys, allowing it a degree of fiscal flexibility that finance ministers and prime ministers elsewhere can only dream about.
Bibliography
(1) Monnet, Eric. Controlling Credit: Central Banking and the Planned Economy in Postwar France, 1948–1973. Studies in Macroeconomic History. Cambridge: Cambridge University Press, 2018.
(2) Enatsu, Akane. 2013. "The Significance of Japan's Fiscal Investment and Loan Program during Japan's Period of Rapid Economic Growth and Possible Lessons for the Rest of Asia." Nomura Journal of Capital Markets 5 (2): 1–22.
(3) Quennouëlle-Corre, Laure. La place financière de Paris au XXe siècle: Des ambitions contrariées. Paris: Institut de la gestion publique et du développement économique / Comité pour l'histoire économique et financière de la France, 2015.
(4) Doi, Takero, and Takeo Hoshi. 2002. "Paying for the FILP." NBER Working Paper No. 9385. Cambridge, MA: National Bureau of Economic Research.
(5) Chien, Yili, Wenxin Du, and Hanno Lustig. 2025. "Japan's Debt Puzzle: Sovereign Wealth Fund from Borrowed Money." Journal of Economic Perspectives 39 (4): 3-26.