[Series No.4] When Markets Bring Down a Government

 

[Series No.4] When Markets Bring Down a Government

Theme: The Achievements and Failures of Abenomics and Sanaenomics

— The Dangerous Parallels Between the Truss Government and Contemporary Japan
— Understanding the Fate of “Double Down” Strategies Through History

 

     January 16, 2026

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1. Markets Move Faster, Colder, and More Ruthlessly Than Politics

In 2022, a historic event unfolded in the United Kingdom.
Prime Minister Liz Truss was forced to resign after just 49 days in office.

There was only one reason:

The market rejected her policies.

• A crash in government bonds
• A sharp fall in the pound
• Pension funds on the brink of collapse
• A spike in OIS
• A surge in interest rates

These elements moved in unison,
and the market effectively executed the government.

This incident symbolized a new political phenomenon of the 21st century:

“A democratically elected government can be toppled by the market.”

And today,
Japan is beginning to resemble this British pattern—dangerously so.

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2. The “Structure” That Brought Down the Truss Government Is Identical to Japan’s

The failure of the Truss administration was not a mere policy mistake.
It was a structural error.

That structure can be summarized in five points:

1. Loss of fiscal discipline
   → Japan: Debt at 260% of GDP. Fiscal discipline has effectively vanished.

2. Distorted interest rates
   → Japan: Zero interest rates locked in. Price discovery has disappeared.

3. Declining currency credibility
   → Japan: Gold prices have quintupled. The yen’s purchasing power has plunged.

4. Dysfunctional government bond market
   → Japan: The BOJ holds more than half of all JGBs. Some days see no trading at all.

5. Short-termism and emotional politics
   → Japan: Snap dissolutions, right‑wing appeasement, political turbulence.

In short,
all five factors that toppled the Truss government are now present in Japan.

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3. The Trigger for the Collapse Was OIS

The first sign of the Truss government’s downfall
was neither government bonds nor the pound.
It was OIS (market expectations of future interest rates).

• The government announced tax cuts
• Markets judged the fiscal outlook as unsustainable
• OIS surged
• Government bonds crashed
• The pound plummeted
• Pension funds neared collapse
• The government fell

This chain reaction began
the moment the market saw through the policy deception.

And now,
Japan’s OIS is beginning to move quietly.

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4. Japan’s Risk Level Is Higher Than the UK’s

The key difference between the UK and Japan is simple:

Japan is in a more dangerous position.

United Kingdom

• Debt: 100% of GDP
• Interest rates: Market‑determined
• Currency: Part of the global reserve currency system
• Bond market: Functioning

Japan

• Debt: 260% of GDP (worst among advanced economies)
• Interest rates: Fixed by the BOJ
• Currency: Purchasing power has shrunk to one‑fifth
• Bond market: Nearly dysfunctional

In other words,
Japan’s structure makes it far easier for the “market insurgents” to revolt.

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5. The Snap Dissolution Will Provoke the “Market Insurgents”

A snap dissolution is not merely a political event.

Markets dislike political turmoil far less than they dislike:

“The loss of policy predictability.”

• Fiscal discipline is gone
• Interest rates are suppressed
• The yen is weakening
• Gold prices are soaring
• The bond market is dysfunctional

If political dynamics become emotional under these conditions,
the market will inevitably react.

Just as it did with the Truss government.

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6. Conclusion: Japan Has Entered an Era Where Markets Can Topple Governments

A reader once asked me a question,
and the words that came out of my mouth instinctively
may have struck closer to the truth than I realized:

“The market might bring it down, you know.”

This is not an exaggeration.
It is a historical reality.

And now,
Japan is approaching that historical pattern with alarming speed.

• OIS begins to move
• Gold prices surge
• The yen is sold
• The bond market tightens
• Political turmoil intensifies

Once this chain reaction begins,
the Double Down strategy will reach its end.

Japan now stands at a civilizational crossroads,
where the credibility of its currency and the sustainability of its institutions are at stake.

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Tomo Nakamaru
Former Economist, World Bank