July 24, 2025 | Japan’s Bond Market Crisis Intensifies – Has BOJ Finally Lost Control?

Japan, with its highest in human history per capita government debt, has been an accident waiting to happen for a long time. But somehow, it has always managed to slip out of whatever trap the financial markets set for it.

Until now?

Japanese interest rates have been rising, increasing government interest costs and leading traders to wonder if the Bank of Japan has lost control of the narrative:

Some headlines from just the past couple of weeks:

Japan bond market blows out as election angst grips investors

Will Japan’s Rice Price Shock Lead To Government Collapse And Spark A Global Bond Crisis

Japan faces 40-Year Debt Sale as Fiscal Fears Linger After Vote

Japan’s bond market is breaking down as yields and volatility surge to multi-decade highs

Here’s an excerpt from an article that explains why the rest of the world — the US in particular — should care:

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

(Financial Post) – 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.

The quiet anchor is slipping

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.

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.

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

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.

Why this matters for the U.S.

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.

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:

• Reduced demand for U.S. debt, especially at the long end of the curve.
• Higher yields, as the Treasury struggles to attract buyers.
• Increased volatility, as global capital flows realign.

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.

The end of the MMT era

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.

Read the rest of the article here.

John Rubino July 24th, 2025

Posted In: John Rubino Substack

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