Economist Peter Schiff said Saturday that Japan’s mounting debt and bond market pressures could spark the next global financial crisis, warning that turmoil in Japan could spill over into U.S. financial markets.

Japan Could Be the Catalyst

Japan’s debt and currency problems have reached a point where the country’s financial system could unravel before the U.S., according to Schiff, making it the trigger for a broader global financial crisis rather than another regional downturn.

Speaking on The Peter Schiff Show Podcast, he said the yen’s slide to a 40-year low against the dollar and rising Japanese government bond yields show that years of artificially low interest rates have left Japan’s policymakers with few options to stabilize the economy.

“The Japanese crisis may be the catalyst for our crisis,” Schiff said.

“It may be the pin that pricks our bubble. The Japanese bubble popping ends up pricking the even bigger U.S. bubble.”

As of late Sunday, the yen traded at 163.58 per U.S. dollar, its weakest level in nearly four decades.

Over the past year, the Invesco CurrencyShares Japanese Yen Trust (NYSE:FXY), which tracks the yen against the U.S. dollar, has fallen nearly 10%.

Japan Faces A Difficult Choice

Schiff said Japan will either have to raise interest rates aggressively, potentially to 3% or higher, to contain the crisis or risk “fueling the fire” with only modest rate increases, warning that either outcome would spill over into U.S. markets

The Bank of Japan raised its benchmark short-term policy rate from 0.75% to 1% in June, the highest level since 1995, as policymakers sought to normalize monetary policy amid mounting inflation pressures.

Why America Could Be Next

The ripple effects would extend well beyond Japan, Schiff said, as investors repatriate capital and sell U.S. assets, including Treasuries, while the Japanese government could also reduce its Treasury holdings to shore up its finances.

Japan is the world’s largest foreign holder of U.S. Treasuries, with more than $1.1 trillion in holdings.

Schiff said those moves would drive U.S. borrowing costs higher and make it more expensive for Washington to finance its growing debt burden, adding that the U.S. is in a weaker position because it is the world’s largest debtor nation.

Price Action: FXY closed 0.05% higher on Friday at $56.04.

Benzinga edge rankings indicate FXY has a Momentum score in the 22nd percentile and a negative price trend across the short, medium and long term.

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