Japan’s bond market is flashing red. Here’s why investors should pay attention

The Bank of Japan headquarters in Tokyo. Photo by /Shuji Kajiyama/AP files

Article content

In 2008, Japan was the quiet stabilizer in an unravelling world. Its central bank was passive, its interest rates were near zero and its bond market quietly absorbed global capital. Fast forward to 2025, and Japan is no longer the ballast, it’s the epicentre of a potential sovereign debt crisis. And what’s happening there could soon ripple across the globe, especially into the U.S. Treasury market.

Article content

Article content

The quiet anchor is slipping

Article content

Article content

Article content

Japan’s government bond yields are rising at a pace not seen in decades. The 30-year Japanese Government Bond (JGB) recently breached 3.2 per cent, the highest level on record. The 10-year yield is now above 1.58 per cent, a level that would have been unthinkable just a few years ago.

Article content

But this isn’t a healthy normalization. It’s a structural repricing driven by a collapsing yen, rising energy costs, and a growing loss of confidence in the Bank of Japan (BOJ). The central bank’s long-standing policy of yield curve control is being overwhelmed by market forces. Investors are no longer waiting for the BOJ to lead; they’re setting the terms themselves.

Article content

Japan now faces a brutal policy bind: Defend the bond market and the yen collapses, or defend the yen and bond yields spike.

Article content

With a debt-to-GDP ratio exceeding 260 per cent, Japan’s fiscal math is already fragile. At the same time, as of mid-July 2025, the yen is trading near 150 yen to the U.S. dollar, its lowest level in more than 30 years. The most likely path forward is quiet intervention: stealth bond purchases, liquidity injections and vague reassurances. But the core issue remains: The BOJ no longer commands the market narrative.

Article content

Article content

Why this matters for the U.S.

Article content

Article content

Japan isn’t just another economy. It’s the largest foreign holder of U.S. Treasuries, with more than US$1.13 trillion in holdings. For decades, Japanese investors have been reliable buyers of U.S. debt, helping to keep American borrowing costs low. But that may be changing.

Article content

As yields rise at home and the yen weakens, Japanese investors are under pressure to repatriate capital and sell foreign bonds, including U.S. Treasuries, to invest domestically. This shift could have serious consequences:

Article content

Article content

In short, if Japan steps back from the U.S. bond market, America’s borrowing costs could rise sharply, just as its own fiscal challenges are mounting.

Article content

The end of the MMT era

Article content

This moment also marks a turning point for central banks more broadly. The era of Modern Monetary Theory (MMT) — the idea that governments can print money to fund spending without consequence — is effectively over. The Federal Reserve can no longer rely on unlimited bond buying to stabilize markets. The risks of inflation, currency devaluation, and loss of investor confidence are now too great. And Japan is giving the world a glimpse of what happens when debt levels become unsustainable and central banks lose control. The U.S. may not be far behind.