If you (like me) have been following financial markets with any regularity, maybe you’ve wondered why Bloomberg and CNBC and the financial media talk about Japanese government bonds (JGBs) more often than any other non-U.S. non-Treasury. Why?
Granted, Japan is the world’s most indebted nation (as a percent of GDP). But Japan’s net sovereign debt in absolute terms ($9 trillion) doesn’t hold a candle to the U.S. national debt ($34 trillion). But we never hear about UK gilt rates, nobody talks about German bunds… Why does Japan matter?
I think I figured it out. Answer below.
Executive summary
Japan doesn’t matter because of its size – it matters because Japanese government bonds (JGBs) are the primary tool of global leverage. When JGB yields move, the cost of risk everywhere reprices.
Why Japan matters disproportionately in risk-off moments
Japan isn’t “just another developed market.” For 30+ years it has been the load-bearing pillar of global leverage.
1) The JGB market, the yen, and the global carry trade
Core fact: Japan engineered the world’s longest experiment in near-zero interest rates.
- Since the 1990s, Bank of Japan suppressed yields via ZIRP, NIRP, and yield-curve control.
- ZIRP: Zero interest rate policy
- NIRP: negative interest rate policy
- yield-curve control: Attempting to manipulate bond rates by buying a specific duration of bond – for example, buying long term bonds pushes down long term interest rates.
- This turned yen funding into the cheapest, most reliable source of leverage on Earth.
“Yen funding” explained:
- Traders can borrow in yen at 0%
- Convert to dollars / euros
- Buy anything with yield: Treasurys, investment-grade corporate debt, emerging market sovereign debt, dividend-paying equities, private credit, real estate – anything!
- Profit
This wasn’t a niche hedge-fund trade. It became structural plumbing, relied on by:
- Japanese banks
- Global life insurers
- Pension funds worldwide
- International macro and relative-value investing desks
- At big banks
- At hedge funds
The yen is unique
- Stable
- Liquid
- Politically safe
- Backed by massive domestic savings
- In Japan, families typically save 10-20% of disposable income
- The real estate/stock market crash of the 1989-1991 scarred the population severely; an entire generation of citizens basically rejected risk and saved exclusively in cash/JGBs
- In comparison, in the U.S. the average savings rate since 2020: 5.7%
Result:
- The yen became the world’s funding currency
- JGBs became the anchor that kept global risk assets levered at scale
- In other words, Japan gave the whole world free credit.
2) Why any yen shock hits the entire financial system
When JGB yields move meaningfully, it breaks assumptions that trillions of dollars of positions are built on.
A. Carry trades unwind fast
If Japanese yields rise:
- Yen borrowing costs rise
- Currency hedging costs explode
- Levered trades flip from profitable to loss-making
That forces:
- Forced buying of yen on currency markets
- Forced selling of foreign assets
- Volatility spikes across rates, credit, and equities
This is mechanical, not emotional.
…in other words, when Japanese bonds surprise traders, it forces a mini-Great Repricing.
B. Japanese capital comes home
Japan is one of the largest external holders of:
- U.S. Treasurys
- Mortgage-backed bonds
- Global credit in all forms (corporate debt, sovereign debt of developed and emerging nations and so on)
If JGBs suddenly yield 3-4%:
- Japanese investors no longer need foreign assets
- …so they bring their capital home – drying up global liquidity
- …which pushes global yields higher
- and strengthens the yen, making those outstanding carry trades more expensive to unwind
It’s a very specific sort of self-reinforcing negative feedback loop.
This is why:
- U.S. long rates jump when JGBs sell off
- Equity sells off globally (especially growth)
- “Risk-free” stops being free
C. Foreign currency (forex, FX) volatility spikes system-wide
A disorderly yen move:
- Breaks hedges
- Triggers margin calls
- Forces cross-asset deleveraging
Historically, yen strength = risk-off climate because it signals leverage coming out of the financial system.
D. The psychological line has been crossed
Japan was the last anchor of “rates can’t rise.” But now they are…
Once investors doubt both:
- Government’s fiscal discipline (big deficits)
- Central bank’s control (bonds trading out of line with central bank rate targets)
…then you get chaos.
That’s why people are invoking a “Liz Truss moment.” Not because Japan will default (remember, it’s virtually impossible for a sovereign that prints its own currency to default). But because confidence is shaky and global leverage is getting more expensive.
Postscript for Gen X
Do you remember the 80s? Vapor’s famous song?
Do you remember when these films were playing on the big screen?
(If you haven’t seen them for a while, Die Hard absolutely holds up. Rising Sun, not so much…)
Back in the 1980s, the Japanese were going to take over the world. They were the wealthiest nation in history. Tokyo’s streets were paved with gold… The site of the Imperial Palace in Kyoto was, at one point, worth more than the entire state of California.
Japanese cars were crushing Detroit’s automakers not just on price, but on quality and innovation. The xenophobic nation that we actually nuked (twice!) somehow crawled out of the ashes and was beating the U.S. at its own game. No one could figure out how they were doing it! To make matters even worse, the Japanese manufacturers were happy to explain, and even to demonstrate, how their factories worked. Kaizen entered the corporate vocabulary.
The Japanese hadn’t been able to beat America in a war, so instead they were going to buy America one piece at a time.
A Japanese company bought Rockefeller Center. (I only found out about it because I heard someone complaining that the new owners were so thrifty they turned off the Christmas tree lights at 10pm.)
The Japanese had so many advantages over us, we were told. It was their ancient culture. Their insistence on personal and professional excellence. Their prosocial, collectivist society. Their Buddhism.
Upscale schools offered classes in Japanese language, and anxious middle-class parents enrolled their children by the thousands. Managers purchased copies of Miyamoto Musashi’s Book of Five Rings and, in an amusing if inadvertent expression of racism, Sun Tzu’s Art of War.
We have seen the future, and it was Japanese…
But then? Well, then they went away. Turns out the entire Japanese economic miracle had, at its base, an incredibly inflated stock and real estate bubble. It took about 20 years for the Japanese economy to recover from average annual GDP growth of just 0.13%. Stalling speed. Imagine that! Year after year… No wonder folks saved so much money.
They endured a lost decade. Then another one!
I’m certain there’s a lesson here, but I’ll leave its precise phrasing to the reader.