Japan Could Burst the U.S. Bubble

Peter Schiff has warned that Japan’s financial troubles could spill over into the United States. The key concerns are a weak yen, rising debt-servicing costs, and the country’s enormous public debt, which exceeds 200% of GDP.

The yen has fallen against the dollar to its lowest level in 40 years. Yields on 30-year Japanese government bonds have approached a record 4%, while 10-year yields have returned to levels last seen in 1996. Despite this, Japan’s benchmark interest rate remains at just 1%.

The Bank of Japan is therefore caught in a difficult position. Sharp interest-rate increases could trigger a recession and encourage investors to withdraw money from overseas markets. Failing to act, however, risks weakening the yen even further.

This matters to the United States because Japan holds more than $1.1 trillion in U.S. Treasury securities, making it their largest foreign holder. According to Schiff, a crisis could force Tokyo to sell these assets on a massive scale, potentially bursting the U.S. financial bubble.

The situation is being made worse by the rising cost of U.S. debt. The yield on 30-year Treasury bonds has climbed to 5.16%, its highest level since 2006. U.S. national debt has already exceeded $39.6 trillion and is now more than four times higher than it was 20 years ago.

At the same time, investors have begun taking a more cautious view of artificial intelligence. Alphabet lost 10% after announcing higher-than-expected spending. Oracle fell almost 8% in a week and is down 41% since the beginning of the year. Meta dropped 7.3%, Amazon 6.8%, and Microsoft 2.7%. Microsoft’s decline this year has now reached 19.3%.

Schiff believes the market is beginning to question whether the enormous sums invested in AI will actually generate adequate returns. Companies are spending approximately $750 billion a year on the technology. The economist compared the current boom to the wave of investment that preceded the dot-com crash. He does not dispute AI’s future importance, but believes investors expect profits too quickly.

The sell-off also affected Elon Musk’s companies. SpaceX lost 7.7% during the week and is now 49% below its post-IPO peak. By the end of the year, the proportion of shares available for public trading is expected to rise from 5% to 40%. Tesla fell 18% and is currently 35% below its 52-week high. According to Schiff, Musk lost nearly $100 billion in a single week.

Another concern is the rising price of oil. It has climbed above $100 per barrel, gaining around 30% in July alone because of tensions surrounding Iran. Schiff therefore expects July’s inflation reading, due to be published in August, to come in higher.

Gold gained approximately 1% during the week. The GDX gold miners index rose 5.6%, while the GDXJ junior miners index climbed 5.8%. Schiff sees this as a possible sign that the sector’s downturn may be nearing its end.

The economist also commented on the decline in new unemployment benefit claims to 187,000. In his view, such data are less meaningful today because of the growth of gig work and weakness in the broader labour market.

Schiff also criticised the Trump administration’s tariffs on goods from around 60 countries. They were introduced under the Trade Act of 1974 and applied to products linked to forced labour. Schiff described the tariffs as an unconstitutional tax whose cost would ultimately be borne by American consumers.