Why What Happens In Japan’s Debt Market Matters To You

The Japanese yen’s turmoil threatened to hit Americans with higher prices for mortgages, investments and borrowing costs, as rising interest rates in Japan could entice investors to ditch Treasurys for Japanese bonds.

Japan held more than $1 trillion in U.S. Treasurys, making its investors a key source of financing for Washington as the national debt topped $40 trillion. If Japanese investors sell American debt to take advantage of rising returns at home, the Treasury might have to offer higher yields to attract other buyers in a bidding war, raising the government’s interest costs and potentially pushing up rates on mortgages and business loans for American consumers.

A broader retreat from U.S. assets could also put downward pressure on the dollar. A weaker dollar would make imported goods and foreign services more expensive for Americans, diminishing their purchasing power.

Japanese investors sold a net ¥3 trillion ($18.7 billion) of foreign bonds through Aug. 22, the largest year-to-date outflow since 2022, Reuters reported. Japanese government bond yields climbed to levels not seen in decades, giving the country’s investors more reason to keep their money at home.

“I know it first hand from talking to Japanese investors,” Michael Weidner, co-head of global fixed income at Lazard Asset Management, told Reuters. “They’ve underinvested in yen securities for probably 25 years. Now it’s become more attractive and they are reallocating.”

Japanese investors held approximately $1.117 trillion in U.S. Treasury securities as of June, according to Treasury Department data, down from roughly $1.225 trillion in January.

If Japanese investors sell more Treasurys, the U.S. government could have to pay higher interest rates to borrow. Treasury yields also serve as benchmarks across the American financial system, meaning higher government borrowing costs can feed into mortgage rates, corporate debt and other forms of credit.

Toshinobu Chiba, a Tokyo-based fund manager at Simplex Asset Management, told Reuters he had turned bearish on Treasurys and started buying ten-year Japanese government bonds.

“Most of the lifers have a strong incentive to buy right now,” Chiba told Reuters. “It’s a natural movement for Japanese investors to pull money out of the U.S. and back into Japan.”