Why Japan’s Debt Woes Could Turn Into a Global Debt Crisis
Japan’s rising bond yields could turn a domestic debt problem into a global liquidity shock. If the 10-year JGB moves toward the model-implied 4.5%, the shrinking U.S.-Japan yield gap could unwind the yen carry trade, drain demand from U.S. Treasuries and push borrowing costs higher worldwide.
Japan is the Land of the Rising Sun. Japanese bond yields are rising too. And if that rise continues, a significant pillar of the global financial system could come under increasing pressure. The number I’m watching is 4.5%. Why? Because my model suggests Japanese 10-year government bond yields should ultimately be trading at 4.5%, rather than the 2.9% level used in my model comparison. If yields were to move towards that level, the consequences could extend far beyond Tokyo. They could reach into U.S. Treasuries, global liquidity and, most notably, the enormous yen carry trade.