Japan – one of the world’s leading economies and the largest foreign holder of US Treasury debt – is entering a phase of rising interest rates following three decades of ultra-low borrowing costs. With a debt-to-GDP ratio near a mammoth 235%, even a modest rate rise threatens to destabilise its domestic finances. But the real shockwave will be felt abroad, with Japan holding a staggering $1.2 trillion in US Treasuries – more than any other country. Analysts warn that as Japanese yields rise and the infamous yen “carry trade” unwinds, hundreds of billions of dollars could leave US markets. That would lead to higher US interest rates, more expensive mortgages and credit, and increased volatility in stocks, bonds, crypto and retirement savings.
As the biggest owner of US debt, Japan’s moves will affect Americans – and anyone holding US-based assets like most stocks – more than they realise. A policy adjustment in Tokyo could affect millions of people in the US and around the world, who are worryingly unaware how closely linked their savings are to an Asian central bank’s next move.
Japan’s Debt Burden: A 30-Year Experiment Fails
The country’s public debt is currently 235% of GDP. It’s by far the biggest of any advanced economy, and it’s double the US’ already-alarming 120%. How did it get so bad?
In the early 1990s, Japan’s stock and real-estate bubble burst. The country endured three “lost decades” of zero growth, low inflation, and repeated failed attempts at economic stimulus. The government borrowed aggressively to support the economy, while the Bank of Japan (BoJ) pushed interest rates to zero and even negative levels, meaning you paid back less than you borrowed. The BoJ ended up buying half of all outstanding government bonds (debt), effectively financing public deficits at near-zero cost.
The system worked while inflation and yields stayed low. Both of which are now coming undone.
The Financial Earthquake With Tremors Felt Worldwide
In November this year, Japan announced a major stimulus package exceeding 18 trillion yen ($117 billion). This isn’t totally out of the ordinary given the country’s post-bubble attempts, but markets reacted in a way Japan had not seen in nearly two decades: Japanese bond yields spiked sharply.
This reaction signalled a greater shift: investors no longer believe that Japan can indefinitely finance enormous deficits at near-zero rates. Higher yields mean higher interest rates, higher refinancing costs, and much more expensive interest payments on their own debt. Even small increases in borrowing rates threaten to erode the country’s fiscal stability because of the vastness of the debt itself.
So, Why Is This America’s Problem?
Japan being the single largest foreign buyer of US Treasury bonds is a critical point here. The reason for the massive $1.2 trillion value is simple – while borrowing in Japan was almost free, institutions could take on hundreds of billions in debt and invest it in the US’ high-yield bonds. A Japanese pension fund, for example, would earn no interest if invested at home. So, borrowing at 0%, getting 4-5% returns on US Treasuries and pocketing the difference was as good as free money.
However, as rates rise in Japan and its own bond yields increase too, it becomes less worthwhile to invest abroad. Including currency hedging risk, the reward is suddenly much lower today than in previous decades. As a result, an unprecedented US bond sell-off could be imminent, with hundreds of billions of dollars leaving the US debt market and back towards Japan. If that happens, the US faces:
- Falling Treasury prices and rising yields
- More expensive mortgages, credit, and business loans
- Higher interest costs on federal debt
- Volatility in stock and cryptocurrency markets
The US already spends $1 trillion per year on interest payments alone – more than its entire defense budget. Every percentage point increase in rates adds $200-300 billion to federal interest payments. That increase can only come from higher taxes, spending cuts, or money printing – all of which bring profound consequences.
Japan Crashed Markets the Same Way in 2024
Before considering all of this hypothetical, we must return to last year when the Bank of Japan’s minor adjustment triggered massive US market moves. In August 2024, we experienced:
- S&P 500 declined 8%
- Nasdaq dropped 10%
- Bitcoin price fell 23%
These moves reversed after the BoJ retreated. This time, Japan may not have the option for a U-turn.
How the Yen Carry Trade Worked
For decades, the “yen carry trade” was one of the most significant – and least discussed – engines of global liquidity. The mechanics were simple
- Borrow cheaply in Japan – at or below 0% interest
- Invest abroad in higher-yielding assets, especially “super safe” US Treasuries
- Take the difference as profit
The mass adoption of this tactic by hedge funds, banks, insurers, and institutional investors spread across global finance and the volume of yen-funded investments reached trillions of dollars.
But when Japanese rates rise, this trade becomes less profitable – or even outright unviable. Investors need to unwind positions, selling their Treasuries, stocks, REITs and other assets. The result can be sudden, broad-based market declines.
How Tokyo’s Policy Change Hits Your Pocket
US financial conditions are built on Treasury yields. As prices fall and yields rise, the entire credit system reprices:
- Car loans become more expensive
- Mortgage rates increase
- Small business credit tightens
- Stock valuations fall as discount rates rise
- Corporate borrowing drops
This is the chain reaction triggered when a major buyer like Japan reduces Treasury purchases or becomes a net seller.
Japan doesn’t need to dump all of its assets at once for this problem to emerge. Even a gradual or partial allocation shift is enough to tighten financial conditions for millions of households.
What Ordinary Investors Must Understand
This isn’t designed to drive everyone to fear and to offload their assets. What’s important here is for regular investors and retirement savers to understand the system’s interconnectedness. Key points to grasp are:
- Japan’s rate policy matters globally – you do not need to own Japanese assets to be exposed to the country’s decisions
- Treasuries are not immune to losses – rising yields decrease prices, impacting bond funds and defensive portfolios
- Diversification across regions and asset types matter now more than ever – global portfolios, and those spread across different asset classes, are less exposed than investors exclusively holding US equities
- Carry trades magnify volatility – forced unwinding can trigger selling of unrelated assets, hitting index funds and crypto alike
- The US will face higher structural borrowing costs – this affects everything from government budgets to consumer credit
Final Thought
Japan’s interest rate rise is not simply a domestic story about an over-leveraged economy trying to regain balance. It’s the mass unwinding of a 30-year global financial arrangement that quietly kept US borrowing cheap and liquidity abundant. When the world’s biggest buyer of US debt changes its trajectory, the aftershocks hit everyone from retirees in Florida to homebuyers in Ohio to tech investors in California. The question is not whether Japan’s pivot affects the global economy, but rather how quickly and deeply the repercussions will spread.
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Categories: Did You Know?, US News, World News
…well, there’s another unfolding issue to concern us, Rhoda…it’s helpful to be made aware… the ubiquitous interconnections are layers deep, and through ur article i learned that Japan holds the largest amount of US debt, i had thought it was China…i wonder would this issue in conjunction with a scamdemic be in the globalists sights…here’s a link to an article on a useful site… Understanding China’s Ownership of U.S. Debt https://share.google/eqirQNM2lvZAKIeVw … we’re living in times that are potentially accelerating our possibilities of learning, as if so much material, i mean over an array of relevant and crucial topics, through devious uses of which allows the exertions of controls, is, applying the analogy of it’s washing up on a sea shore, and is thus subject to our inspection, literally… 🙏➕🙏…
… apologies, my comment should be directed to g. Calder… 🙏➕🙏…