Japan’s double currency-and-bond-market crisis could pull more than $2 trillion out of US stocks and Treasuries, threatening a wider global selloff.
The yen’s prolonged collapse has made Japan 10% to 30% cheaper for foreign tourists, but imported food, fuel and electricity increasingly expensive for residents. Japan imports most of its energy, leaving it highly exposed to renewed conflict with Iran and further disruption to oil and shipping. Tokyo has already spent more than $70 billion defending the yen without achieving a lasting recovery.
The damage is spreading through the economy. Household spending fell 0.4% year over year in May, its sixth consecutive monthly decline. Imports represent more than 20% of GDP, while over half of internationally active Japanese companies operate in manufacturing and depend heavily on dollar-priced materials and components. Yen-related corporate bankruptcies have consequently surged from just one in 2022 to 45 in 2026, despite more than half the year remaining.
The Bank of Japan cannot easily rescue the currency. Aggressive rate increases would support the yen but raise borrowing costs for companies and Japan’s heavily indebted government. Instead, the BOJ has reduced its balance sheet by 15.6% from its 2024 peak and begun selling bonds, bank shares, real estate funds and other equities. Initial equity sales may cover around 1% of its portfolio, potentially increasing toward 10%.
These measures are placing pressure on Japanese markets. The 10-year government bond yield is approaching 3%, near levels last seen in 1996. Meanwhile, a $2.3 trillion government spending plan spread across 14 years will require additional borrowing. Producer prices are rising 7.1% annually, compared with consumer inflation of 1.7%, indicating that subsidies are temporarily shielding households.
Domestic bonds now offer roughly three times their yield from three years ago. Meiji Yasuda plans to double ultra-long bond purchases in 2026 to more than ¥2 trillion, approximately $12 billion. Tax incentives could encourage further repatriation.
Japanese institutions currently hold over $2 trillion in US Treasuries and equities. Selling even part of these assets would weaken American markets while increasing demand for yen. A simultaneous unwinding of yen-funded carry trades could force investors to sell US stocks and bonds together, especially if Japanese yields approach 3.5%, potentially triggering a global correction.
#Japan #USbonds #Economy
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Credit to : Economic Shift