Japan Just Imploded Global Bonds – Currency Reversal Begins As US Assets Start To Crash

Japan Just Imploded Global Bonds – Currency Reversal Begins As US Assets Start To Crash

So this is a big one. Japan just clobbered US financial markets and no one really expected that. Now the big risk Japan faces a consistent risk is their debt power. You can’t keep borrowing money without facing consequences down the road. Eventually it will happen. However, Japan is facing another problem and that is inflation. And as it turns out this crisis is worse than we thought. People are going broke in Japan and the Bank of Japan is finally trapped. Now, inflation in Japan is still out of control. It’s nearly 3% in the capital, while BOJ’s target is just 2%. But it gets worse. Wage growth in the country is only 1.9%. So, Japanese people are losing buying power. Now, imagine your salary going up, but at a store, you get to buy less and less. Sooner or later, domestic consumption is going to collapse. Now, all the concerns about the debt exploding seems to have gone out the window. This is dangerous because Japan is about to drop a $120 billion stimulus in the months to come. That is an insane $3.4% of GDP spend, and a huge part of it is through money printing. But bringing down inflation and saving the collapsing yen is more urgent. But it won’t end well, that’s for sure. The BOJ gave their strongest possible hint that the December rate hike is coming. Despite the debt to GDP hitting 230% and despite exports in crisis, rates are going to heat up in Japan. And almost immediately, this is starting to crush global bond markets. The biggest casualty of all is the United States. And the timing couldn’t be any worse. In December, the Fed is likely going to cut and that means the incentives to hold dollars and US bonds are going to drop. If Japan hikes during this exact same period, it’s going to shock the Treasury market. Now, yields in Japan are flying up and we are now at historic levels only seen during the Great Financial Crisis. The 10-year bond has surged to 1.84% and the last time that happened was in 2008 during the housing collapse. The 20-year yield is nearly 2.9%, another record high since 1998. Even the short-term 2-year JGB yield has crossed the pivotal 1% mark back to the GFC levels. Now, this pivot from the BOJ is critical to understand. It sets Japanese bonds to compete with US treasuries. A rate hike is more than just fighting inflation. is a signal to investors to put their money in Japanese bonds. They’re calling back their local money to reenter Japan. Now, next to the Chinese, Japanese investors are some of the largest in the world. And because rates were so low in the country for so long, they would often send their money overseas to chase yield. And for the longest time, US bonds were the gold standard for Japanese money. But things have been changing since last year. There’s nearly $5 trillion worth of Japanese money invested abroad, but since 2024, they have been shifting more towards domestic government bonds. In the first 8 months, they bought 28 trillion yen of JGBs. In contrast, they cut buying of foreign bonds by 50%. Which definitely includes US Treasury notes. Now that interest rates are rising, it creates a powerful tailwind that can cause this unwind to get exponentially worse. The thread isn’t just a bigger gap in interest rates, though that is important. The real crisis comes if the yen does strengthen against the dollar. The Fed will be cutting in 2026. And if Japan continues to stay cost, their currency could appreciate greatly against the dollar. Now, if that’s the case, it doesn’t make sense for Japanese investors to buy US bonds. You have zero currency risk with JGBs. It’s your own currency after all. In the months to come, the yen could very well strengthen by 10% on the back of US rate cards. Morgan Stanley forecast a big repricing of the dollar yen to 140, which is a massive move. Japanese investors will get out of dodge. Even if US bonds yield 4%. they will still lose six or 7% by staying in the reserve currency. You might as well just head back to JGBs, secure the 2% yield without any dollar risk. The Bank of Japan has essentially told the markets that protecting the yen is of paramount importance. Most Japanese goods are imported into the country which directly impacts inflation. Now, weaker yen might help exports, but it destroys both the domestic consumer and industries as well. And it all ties back to Japan’s energy crisis and how they are forever stuck with buying from overseas. Now, Japan imports 90% of their energy needs from the world. Almost 100% of their oil, 97% of LNG, and 100% of their coal. All of these are imported from global markets that mainly sell in dollars. Which means Japan cannot afford for their currency to keep collapsing. The negatives will eventually outweigh the positives of cheaper exports. If your cost of production rises, the falling yen won’t make it more affordable. You just crush your domestic demand in the meantime. Now, both foreign buyers and local buyers can’t afford your Toyotaas, your Hondas, your PlayStations. Even those anime costumes and movies will be too expensive to produce. So, a lot now depends on the fate of the Japanese yen. We could be in store for a massive rally that might have legs to run. Western bonds are already starting to collapse under the weight of Japan’s pivot. From the US to Australia and Spain, global bonds are starting to implode. Yields are flying up, especially when it comes to the US 10-year bond and the German 10-year bond. Investors are leaving because red cards are coming. Once the US cards, we can be sure the rest of the G7 will follow. Their markets are so hyper financialized that interest rates needs to come down. Now the US for example is facing a dual crisis. Trump needs a weaker dollar to paper over the deficits. Rates must also fall for companies to refinance their loans that are being borrowed at 8 9 or even 10% today. US factory activity has contracted by the most in 4 months. Trump’s terrorists are not working and it has in fact collapsed demand. Orders are down and the PMI is also down. Should this continue, more job losses will happen. America’s industrial base will continue to shrink and the only sector left will be AI data centers. Now Trump is stuck. There’s no way he can reverse the trade war. So the only option left is to slam down rates and pray for miracle. There’s no other lever left to pull. This is the equivalent of throwing spaghetti on the wall and seeing what sticks. But Japan’s sudden move just threw a wrench into Trump’s plan. If the BOJ didn’t hike rates, it would be more or less status quo. But now the threat of a big currency reversal is turning US markets on its head. Now back in October, Besson hinted to Japan about the need to hike rates and it looks like Japan is following orders. But Besson forgot about the unintended consequences. And when we read between the lines, especially the part around balancing growth and inflationary pressures, it’s clear what Besson wanted. He wanted Japan to strengthen the yen through monetary policy. He didn’t want Japan to take the other option, which is to dumb US treasuries for obvious reasons. And it looks like Japan has answered the call. However, it’s not working out and things could spiral out of control in US markets. The market is not operating in a vacuum and whatever plan Besson has conjured in his brain can just as easily crash and burn. Now, if this is the genuine reversal of the yen, then there’s a lot of room left for the currency to appreciate, which means the greater the odds of money flowing away from the US back to Japan. Now, since the pandemic, the yen has crashed by over 30% in value against the dollar. If we compare it to 2010, the yen is probably down more than 60%. Now, I’m not saying that the yen will appreciate by 30% or even 60%. But there is a lot of room for movement. Now, as the US cuts rates and Japan hikes, the odds of this happening increases by a lot. As the yen moves higher, a lot of Japanese pension funds, insurers will be more motivated to just buy domestic bonds. As we said, there’s zero currency risk here. No worry of the dollar’s volatility. No headache in converting the currency. Plus, now Japanese yields are going higher. Rates used to be sub 1% before and it is at 3% today. What a deal. And let’s recall the disaster that happened back in May. Japan’s farmers bank Noric was heavily exposed to US treasuries and when rates went up, bond values went down. This made them lose an incredible $12 billion and they had to dumb US bonds. This only happened because the bank was chasing yield thanks to low rates in Japan. But the situation has clearly changed today. We have the Fed about to slash aggressively in 2026 while the BOJ is hacking the ass. Will Japanese banks and insurance companies expose themselves to the risk? I really don’t think so. This is horrible news for US assets, including stocks as well. A huge buyer in the market is going to disappear and it won’t be easy to get them back. The conditions have truly changed. Now, Japan has sacrificed the long-term debt bubble for short-term gains. Massive stimulus, massive borrowing and rate hikes. All these could send the yen and Japanese stocks higher. This is to the detriment of US stocks and bonds. On December 10, the Fed will likely be cutting rates again, but long-term bonds in the US are rebounding higher to almost 4.1%. It’s in direct response to Japan’s rate hike and flood of stimulus that is also pushing their rates higher. Basically, the world is now swimming in an ocean of bonds and they have to choose the best option. If the dollar continues to fall while the yen rises, suddenly US debt looks rather unattractive. Investors step back from the US and they allocate some money to Japan. Or maybe they just wait on the sidelines to see the mess play out. Either way, it’s going to be harder for Scott Besson to borrow money. The amount of borrowing coming in the next 5 years is simply insane. Just for data centers alone, we are looking at $1.5 trillion needed. That’s 20% of the total investment grade bond market. The US will need the participation of all bond buyers. Not just US investors, not just the big tech companies, not just the hyperscalers, but those from Japan as well. This is simply horrible timing. If Japan brings home their liquidity, suddenly the cost of borrowing for the US rises. It’s not just US assets losing value. The cost of building AI in the future goes up. The entire US economy is predicated on capital flows into the country. It’s supposed to be a sink for global investments. And if that unwinds, revenue is not big enough to justify building all those data centers. And now the future of AI is threatened. Investors today are already starting to buy Japanese bonds driving demand higher for the 10 year. Despite a rate hike coming, they are buying now, which tells us something very important. Buyers are expecting the yen to rise in value. So they are placing their bets right now. That also means they aren’t buying into US bonds. All eyes are truly on Japan today. And once the BOG hikes and should the yen strengthen, we could see a big exodus of money leave the west. This might start with domestic Japanese investors first, but Western money will soon follow to escape the collapsing dollar. It’s going to be really messy. But let me know what you think. Will the Bank of Japan really hike rates? And how bad will the fallout be to the US? Let me know in the comments below. Stay safe. Be sure to smash the like button and subscribe as we navigate through this crazy times.

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In a shock move, Japan’s BOJ is moving to hike rates even though they are facing a major debt crisis. This is starting to implode global bonds. And as the Yen rises, US assets risk a major sell-off.

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