Risks, Repercussions, and Opportunities for the Legal Sector
On 19 May 2025, The Times published an opinion column by Simon French titled “Japan reveals the sun is setting on old‑world debt economics.” French argued that Japan’s surging borrowing costs signal the end of the era when advanced economies could rely on ultra‑cheap debt without consequence.
That warning was underscored the very next day. On 20 May 2025, The Financial Times reported that yields on Japan’s 20‑, 30‑ and 40‑year government bonds had spiked to record highs after a dismal debt auction. Yields on the 30‑year bond climbed to 3.14 per cent and the 40‑year to 3.61 per cent, raising fears that Japanese investors might liquidate foreign assets and repatriate funds.
Together, these two pieces paint a vivid picture: the world’s third‑largest economy is no longer a source of endless cheap capital. Instead, its bond market turbulence threatens to ripple across global debt markets, exposing businesses, consumers and governments to higher costs and heightened geopolitical risk, particularly seen against the growing threat of debt weaponisation by the United States.
The Fragile Economics of Sovereign Debt
Government bonds are legal promises to repay borrowed money with interest over time. They are essential tools for funding public services, infrastructure, and economic programmes. Investors, from pension funds to foreign governments, buy these bonds because they are traditionally viewed as safe and stable.
However, bond markets depend on confidence. When interest rates rise, bond prices fall. The higher the interest rate demanded by the market, the more expensive it becomes for governments to service their debt. Japan’s borrowing costs have surged from near zero to almost 3% on 30-year bonds. This marks a fundamental change not just for Japan but for the global economy, given Japan’s role as a major creditor to other nations.
The Geopolitical Risk of Rule-Change by the United States
Among the most alarming signals is the suggestion by senior US economic figures that the United States might unilaterally change the repayment terms on its government bonds – specifically those held by certain foreign nations. This would involve converting these bonds into zero-interest securities, effectively stripping them of their value while avoiding the technical label of default under US law.
While such a move might be legal under domestic US legislation, it would be seen globally as a sovereign default in all but name. It would shatter trust in the US as the world’s most reliable borrower, destabilise global capital flows, and introduce unprecedented legal and geopolitical tensions.
Global Economic Consequences
The consequences of rising debt costs and potential debt weaponisation include:
- Higher Borrowing Costs Worldwide. Governments, businesses, and households will face higher interest rates on loans, mortgages, and other credit products.
- Public Finance Pressure. Increased debt servicing costs may force governments to cut services or raise taxes, directly affecting citizens and businesses.
- Market Volatility. Investment markets could experience sharp sell-offs as confidence in sovereign debt weakens, impacting pensions, savings, and corporate finance.
- Geopolitical Instability. Retaliatory measures by affected countries could disrupt trade, investment, and international relations, further increasing global economic risk.
New Legal Market Opportunities
Law firms are uniquely positioned to help clients navigate this emerging landscape. The following areas present immediate and medium-term opportunities:
- Sovereign Risk and Political Advisory
- Supporting clients with exposure to government debt markets to assess and manage geopolitical and legal risks.
- Advising on cross-border investment protections and treaty frameworks.
- Debt Restructuring and Enforcement
- Representing investors and creditors in negotiations or litigation arising from debt restructuring or impaired sovereign obligations.
- Supporting governments and corporates with liability management and refinancing strategies.
- Geopolitical and Trade Advisory
- Guiding clients on navigating trade sanctions, tariffs, and cross-border regulatory changes.
- Advising on political risk insurance and contractual protections.
- Dispute Resolution and Arbitration
- Acting in high-stakes disputes involving sovereign debt, investor-state arbitration, and treaty claims.
- Regulatory and Compliance Advisory
- Helping clients adapt to evolving disclosure, reporting, and risk management requirements in response to market volatility.
Positioning for Growth
Law firms should:
- Invest in multi-disciplinary teams, combining legal, economic, and geopolitical expertise to offer clients end-to-end advice.
- Strengthen thought leadership, by publishing timely insights to position the firm as a trusted advisor in times of uncertainty.
- Engage with strategic partners, collaborating with economists, risk consultants, and geopolitical analysts to broaden the value proposition.
By doing so, law firms can not only protect existing client relationships but also capture new market share in one of the most complex and fast-evolving risk landscapes of the modern era.
Conclusion
The threat of debt weaponisation signals a major shift in global economic and legal norms. While the risks are significant, so too are the opportunities for law firms that can move quickly to build expertise and client solutions in this space. Those that do can position themselves as essential partners in helping clients navigate an era defined by economic uncertainty, political risk, and legal complexity.