Global markets are being lulled into a false sense of security: falling short-term interest rates suggest easing financial conditions, yet beneath the surface, long-term yields are surging in a way that signals the early stages of a global debt crisis, according to Robin Brooks, senior fellow at The Brookings Institution.

Japan offers the clearest—and most alarming—example.

Shortly after taking office, Prime Minister Sanae Takaichi unleashed a populist fiscal expansion that shocked markets, The Telegraph reports.

As Nomura Research Institute Executive Economist Takahide Kiuchi warned, “Takaichi should humbly heed the market warnings,” adding that her government now risks triggering a “Japan sell-off” that could set off a triple decline in stocks, bonds, and the yen.

His warning is not just about Japan. It is emblematic of a dangerous global dynamic: central bank rate cuts are obscuring, not offsetting, a dramatic repricing of long-term debt that could soon spill into a worldwide financial reckoning.

Since September, front-end interest rates have declined as the Federal Reserve resumed its easing cycle.

But the truly important story lies at the opposite end of the curve.

Analysts note that “Fed cuts aren’t pulling down long-term yields,” because once you remove the distortion of falling short-term rates, forward yields remain at or near multi-year highs.

For example: the outlook on 10y10y (what investors expect the 10-year interest rate to be 10 years from now) and 10y20y (what investors expect 10-year interest rate for the period starting 20 years out).

The widening gap between these forward rates and standard 10-year yields reflects an ominous trend: investors are increasingly refusing to buy longer-dated sovereign debt.

This buyers’ strike is no longer confined to the U.S. Treasury market. It is spreading across Italy, France, the UK, and even the traditional safe havens of Japan and Germany.

Each country faces different fiscal strains, but the shared outcome is unmistakable: investors are demanding far higher compensation to hold long-term government paper.

This divergence between front-end comfort and long-end alarm is the hallmark of a system drifting toward a multiple-equilibrium debt crisis, where sustainability can evaporate suddenly once markets lose confidence.

Japan, once the quiet anchor of global bond markets, has become the epicenter of this shift. When Takaichi rolled out a ¥20 trillion ($135 billion) fiscal package—dismissed by critics as “low quality” spending stuffed with rice vouchers and fossil fuel subsidies—the reaction was immediate and ferocious.

The benchmark 10-year Japanese government bond yield spiked to 1.94%, its highest level since 1997, and the speed of the move in the normally glacial $12 trillion JGB market stunned investors. Economists in Tokyo were aghast.

As one put it dryly, “Japan is sailing dangerously close to the wind.”

Kawamura Sayuri, chief economist at the Japan Research Institute, warned that Takaichi risks a meltdown akin to the UK Prime Minister Liz Truss’ mini-budget debacle. “All signs point toward a fiscal reckoning,” she said.

Even before this spending surge, Japan’s debt-service costs were veering upward; now they may be pushed into uncontrolled territory.

Textbook economics says a massive fiscal boost should strengthen the yen by lifting interest rates and drawing in global capital. Instead, the currency remains stuck near ¥155 to the dollar, the weakest level in real terms in more than 50 years.

Markets are no longer treating Japan as a safe haven.

The yen has decoupled from the Swiss franc and now resembles an emerging-market currency, vulnerable to confidence shocks and policy missteps. This shift underscores Kiuchi’s warning that a procyclical budget could force investors into a panic, sparking a “triple decline in stocks, bonds, and the yen.”

Japan is merely the most dramatic example of a phenomenon playing out across continents. Countries with large fiscal deficits—the U.S., France, Italy, the UK, Germany—are seeing long-dated yields spike even as recession fears push short-term rates lower.

Germany, long the model of fiscal restraint, is driving yields higher through a large stimulus package and efforts to loosen its constitutional debt brake. The U.S. faces its own troubles as trillion-dollar deficits collide with rising issuance and weakening demand from foreign buyers.

The common thread is simple: long-term bond markets no longer trust governments to manage their debts responsibly.

Japan’s situation illustrates the broader danger. For decades, its interest costs hovered around ¥10 trillion per year, kept stable by near-zero rates even as debt ballooned to 260% of GDP.

Now that inflation has returned and the Bank of Japan is stepping back from yield suppression, that delicate equilibrium is breaking.

The IMF projects that Japan’s interest payments will double by 2030 and quadruple by 2036—and that assumes stability. Historically, such regime shifts tend to be disorderly, not controlled.

What is happening in Japan is happening everywhere: short-term rates are falling, but long-term yields are flashing bright red. The world is entering a debt environment where confidence can evaporate overnight.

The global debt crisis is no longer theoretical. It is already unfolding in real time.