By Vivien Lou Chen
Developments in Japan are creating a risk that investors in the U.S. Treasury market may one day pull the rug out by keeping more of their savings at home
Why turmoil around Japan’s new government could wash up in U.S. financial markets.
Recent developments overseas have the potential to complicate the White House’s agenda to bring down borrowing costs, while heightening competition for investors in the U.S. and Japanese bond markets.
Aggressive fiscal-stimulus efforts by the cabinet of Japan’s first female prime minister, Sanae Takaichi, have created a spike in long-dated yields of Japanese government bonds and further weakness in the yen (USDJPY) in the past few weeks. It’s a situation that is being likened to the September-October 2022 crisis in the U.K., which stemmed from a crisis in confidence over a package of unfunded tax cuts proposed by then-Prime Minister Liz Truss’s government.
Read: Liz Truss redux? Simultaneous drop for Japanese currency and bonds draws eerie parallels
The U.S. needs to manage the cost of interest payments given a more than $38 trillion national debt, and this is a primary motivation for why the Trump administration wants to bring down long-term Treasury yields. Last week, Treasury Secretary Scott Bessent said in a speech in New York that the U.S. is making substantial progress in keeping most market-based rates down. He also said the 10-year “term premium,” or additional compensation demanded by investors to hold the long-dated maturity, is basically unchanged. Longer-duration yields matter because they provide a peg for borrowing rates used by U.S. households, businesses and the government.
Developments in Japan are now creating the risk that U.S. yields could rise alongside Japan’s yields. This week, Japanese government-bond yields hit their highest levels in almost two decades, with the country’s 10-year rate BX:TMBMKJP-10Y spiking above 1.78% to its highest level in more than 17 years. The 40-year yield BX:TMBMKJP-40Y climbed to an all-time high just above 3.7%.
In the U.S., 2-year BX:TMUBMUSD02Y, 10-year BX:TMUBMUSD10Y and 30-year U.S. yields BX:TMUBMUSD30Y finished Thursday’s session at their lowest levels of the past one to two weeks, and kept falling further on Friday. The benchmark 10-year yield was about 4.06% on Friday.
There’s a risk now that U.S. yields may not fall as much as they otherwise might after factoring in market-implied expectations for a series of interest-rate cuts by the Federal Reserve into 2026.
Japan’s large U.S. footprint
Treasury yields are not going to necessarily follow rates on Japanese government bonds higher “on a one-for-one basis,” but there might be a limit on how low they can go, said Adam Turnquist, chief technical strategist at LPL Financial. He added that the impact of Japanese developments on the U.S. bond market could take years to play out, but “we care now because of the direction Japan’s policy is going in” and the possibility that this impact might occur even sooner.
Some of the catalysts that usually tend to push Treasury yields lower, such as any commentary from U.S. monetary policymakers that suggests the Fed might be inclined to cut rates, “might be muted because of the increased value of foreign debt,” Turnquist added.
U.S. government debt was rallying for a second day on Friday, pushing most yields beyond their lowest levels of the past one or two weeks, after New York Fed President John Williams said there is room to cut interest rates in the near term.
All three major U.S. stock indexes DJIA SPX COMP traded sharply higher Friday, but remained on pace for weekly losses, as investors attempted to calm doubts over the artificial-intelligence trade. Separately, some traders suggested bitcoin (BTCUSD) bets were a factor in Thursday’s stock-market selloff.
The troubling spike in yields on Japanese government bonds hasn’t fully spilled over into the U.S. bond market yet, but it remains a risk. “A repeat of the Truss episode is what people are afraid of,” said Marc Chandler, chief market strategist and managing director at Bannockburn Capital Markets.
Concerns about Japan gained added significance on Friday, when Takaichi’s cabinet approved a 21.3 trillion yen (or roughly $140 billion) economic stimulus package, which Reuters described as lavish. The amount of new spending being injected into the country’s economy from a supplementary budget, much of which is not repurposed from existing funds, is 17.7 trillion yen ($112 billion).
Anxiety over Takaichi’s stimulus efforts has resulted in a Japanese yen that has weakened against its major peers and fallen to a 10-month low ahead of Friday’s session, and in a spike in the country’s long-dated yields. Yields on 30-year BX:TMBMKJP-30Y Japanese government debt have risen this month to 3.33%.
Japan is the biggest foreign holder of Treasurys, with a roughly 13% share, according to the most recent data from the U.S. Treasury Department, and the concern is that the country’s investors might one day pull the rug by keeping more of their savings at home.
Bond-auction anxiety
Earlier in the week, a weak 20-year auction in Japan was cited as one reason why U.S. Treasury yields were a touch lower in early New York trading, which means that demand for U.S. government paper remained in place. Global investors are often incentivized to move their money based on which country offers the highest yields and best overall value.
“The conventional wisdom is that as yields rise in Japan, the Japanese are more likely to keep their savings at home rather than export it,” Chandler said. “The Japanese have been buyers of Treasurys and U.S. stocks, and if they decide to keep their money at home, those U.S. markets could lose a bid.”
For now, Japanese investors, which include insurers and pension funds, appear to be continuing to export their savings by buying more foreign government debt like Treasurys. Data from the U.S. Treasury Department shows that as of September, Japanese investors held just under $1.19 trillion in Treasurys, a number which has been climbing every month this year and is up from about $1.06 trillion last December.
One reason for this is the exchange rate. The yen has depreciated against almost every major currency this year. Japanese investors have been buying U.S. Treasurys because they can diversify against the yen, which is the weakest of the G-10 currencies on an unhedged basis, according to Chandler.
If concerns about the Takaichi government’s stimulus efforts translate into even higher yields in Japan, this could incentivize local investors to keep more of their savings at home, but might also mean rising yields for countries like the U.S.
-Vivien Lou Chen
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11-21-25 1541ET
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