A few days were enough for one of the most “stable” corners of the global financial system to collapse — and suddenly capture everyone's attention.
The rapid increase in yields on Japanese government bonds (JGB), especially long-term ones, has triggered a domino effect, writes the Greek press. The turmoil has spread to the yen-dollar exchange rate, touched US government bonds and brought back the markets' old nightmare: when the “stability” of the Japanese currency breaks down, nothing is left untouched.
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The magnitude of the risk is enormous. We're talking about a government debt market valued at more than $7 trillion, according to Bloomberg calculations, that has functioned for decades as a global “axis of calm” — either as a source of cheap financing or as a safe haven in times of crisis.
The moment Japan broke the zero-risk paradigm
The recent massive sell-off has surprised even seasoned managers: yield movements have reached ranges that previously took weeks or months to record. Most worryingly, volatility is not only about interest rates, but also about liquidity.
At ultra-long maturities, the picture has become almost “broken”: 40-year yields have topped 4%, while 30-year yields have seen huge jumps.
The shock was not just macroeconomic – it was deeply political. Japan is heading for a snap election on February 8, with the tax debate at the center of attention.
Markets are now pricing in a combination they once considered unthinkable in the Japanese narrative: inflation that “sticks” + higher interest rates + fiscal easing. And when this happens in a country with a debt-to-GDP ratio estimated at around 230%, the risk premium can only increase.
Why is everyone affected?
The turmoil in the Japanese government bond market is not an isolated, local phenomenon. Japan is at the center of the global financial system, and Japanese government bond yields serve as a benchmark for assessing international risks.
When Japanese yields rise sharply, the pressure is almost automatically transferred to the rest of the major bond markets.
The balance of capital flows is shifting: For years, Japanese insurance companies, banks and pension funds have sought returns abroad, funneling huge sums into US and European bonds. But as domestic yields rise, that incentive weakens, paving the way for either a slowdown in markets or a massive selloff of securities abroad.
This dynamic explains why shocks from Tokyo were felt all the way to Washington. According to estimates cited by international markets and research houses, every 10 basis point rise in Japanese bond yields can translate into a 2 to 3 basis point rise in US bond yields and other key markets. In other words, when Japan's stability “breaks”, the cost of money rises everywhere.
The “elephant in the room”: 5 trillion Japanese capital abroad
The big structural threat is not just the immediate sale of capital. It is about the capital repatriation scenario.
According to the framework described by international analysis, about 5 trillion dollars of Japanese capital is outside the country. If domestic yields continue to rise, some of this capital will have a strong incentive to return to Japan – which in practice means selling foreign bonds/credit products/equities.
There is also a second transmission mechanism: the yen-funded carry trade. When the yen becomes volatile or appreciates suddenly, positions are mechanically unbalanced – not because “opinion” on the stock changes, but because risk limits and margins change.
In 2024, an episode of yen swings linked the currency's move to a massive sell-off in global assets as investors rushed to exit positions that had been built up in cheap Japanese money.
The temptation to intervene
The Bank of Japan has been sending signals that it could step in with bond purchases to limit the turmoil, but each move seems to shift the problem elsewhere: to bonds, to the yen or to the credibility of monetary policy.
At the same time, talk of possible coordinated Japanese-American actions in the foreign exchange market (to support the yen) is intensifying, with Japanese statements of “close coordination” and intense market speculation.
Two details make the situation even more fragile:
- Liquidity on ultra-long maturities is low, so small volume can cause big damage.
- The participation of foreign players in transactions has increased (faster flows, more “nervous” portfolios), which intensifies movements in times of stress.
