Japanese vs. US: Which Are More Cooked?

No one wants Japan’s sovereign debt. 

The global sovereign bond collapse appears to be rapidly worsening. The Bank of Japan (BoJ) owns more than half of its own government bonds, desperate to prop up the economy by buying domestic debt that nobody else wants. But no central bank can prop up an economy forever.

Japan has a long-running fiscal problem which has only gotten worse, ending its epic run of negative interest rate policy in 2024. It seems that fewer and fewer people are interested in holding US debt, but this year’s bond selloff is extending to other countries as well, including Japan.

Japan has no good options after over a decade of aggressive monetary easing, including quantitative easing and yield curve control, aimed at combating deflation and stimulating growth. By purchasing Japanese government bonds, the BoJ kept yields artificially low, enabling the government to finance its staggering debt at minimal cost. However, as inflation in Japan rises, the BoJ is faced with a delicate balancing act: “normalizing” policy without triggering a fiscal crisis in a heavily indebted economy. Now, sovereign bond markets all around the world are showing serious signs of trouble.

The yen carry trade used to be a reliable bet because investors could borrow zero-interest “safe haven” yen to invest in other currencies that paid higher yields. But it depends on both the yen and the other currency, like the dollar, to be within a certain range of strength relative to one another. It requires knowledge of which currency is weaker, and which side’s central bankers are going to keep rates lower or higher. 

With higher interest rates in Japan and Japanese bond yields surging, it could unwind the yen carry trade and push surging US Treasury yields even higher. This all after Moody’s downgraded the US credit rating.

One of the most transformational aspects of the investment landscape is the reclassification of Treasuries as a risk asset. That change first became apparent in the immediate aftermath of the post-Liberalization-Day sell-off, then was highlighted by the recent Moody’s downgrade.

— Peter Schiff (@PeterSchiff) May 24, 2025

At the end of the day, both the dollar and the yen are locked into a slow-motion race to the bottom. Collapsing bonds are among the most glaring symptoms of an oncoming global economic crash. Japan can’t afford sky-high long-term yields, with an out of control debt to GDP ratio, slow growth, and other worrying factors.

The ripple effects are significant for US Treasurys, where Japan is the largest foreign holder with over $1 trillion in holdings. As Japanese government bond yields become more attractive, Japanese investors, including banks and pension funds, are repatriating capital, reducing demand for U.S. bonds. This divestment could push U.S. Treasury yields higher, with the 10-year and 30-year yields already climbing to alarming levels. 

10-Year Treasury Yields, Mid-2020 to Present

Higher U.S. yields increase borrowing costs for the U.S. government, already grappling with a swelling deficit, and could force the Federal Reserve to reconsider rate cuts if inflation spikes. Bessent says we can “outgrow” the debt, but there’s no chance.

Elevated yields could choke economic growth by increasing mortgage, credit card, and auto loan rates, squeezing consumers and businesses already rocked by high prices and excessive debt. A sharp sell-off might destabilize financial markets, as seen in recent volatility attributed to “bond vigilantes” protesting fiscal policy. 

Worse, if foreign demand for US Treasurys dries up, especially from Japan or China, the U.S. could face a funding crisis. That’s when quantitative easing will have to enter the picture, worsening inflation in an attempt to finance surging deficits and kick the collapse can down the road. 

Japan’s bond market turmoil is a stark reminder: global financial interconnectedness means no market is an island, and bond markets in both the US and Japan are screaming loud and clear. The US will be forced into QE one way or another, fueling an inflationary beast that the Fed has never really had under control.