Japanese bond yields are spiking -- and that could mean big trouble for U.S. stocks.

Japan's benchmark 10-year government-bond yields briefly topped 2.9% on Thursday, a level that still sits well below the current 4.57% yield on U.S. Treasuries but nonetheless represents the highest in three decades. The recent selloff in JGBs, in fact, is now in its ninth consecutive session, the longest in nearly 20 years.

Those moves in Japan's $12 trillion bond market, the third largest in the world, are being watched keenly by investors who monitor the yen carry trade, which relies on borrowing at a low interest rate in one currency and then putting it to work where returns are higher.

Japan's yen has facilitated that trade for much of the past five years, in fact, as it fell from a level of around 103 against the U.S. dollar to the four-decade low of 162.83 it reached late last month. The risk is that Japanese yields rise too much, forcing investors to unwind their carry trades.

With the Bank of Japan now slowly raising interest rates -- and vowing to wean itself from supporting the government bond market -- those carry trades are starting to find pressure. Threats of direct intervention in the currency market from Japan's Ministry of Finance, meanwhile, are adding to the concerns.

U.S. investors might think this is a bit too abstract for a market that's powered ahead for much of the past four years, largely fueled by artificial intelligence and the tech sector. History suggests they ignore it at their own risk.

Consider what happened in August of 2024, when the BoJ raised interest rates at home, strengthening the yen, while a weak jobs report in the U.S. accelerated bets on Federal Reserve rate cuts, weakening the dollar. Japan's Nikkei 225 plunged 12.4% in a single day over that period, the biggest decline since the Black Monday crash of 1987, erasing nearly $800 billion in market value in a single session, as the yen rallied hard. But U.S. stocks weren't immune either: The S&P 500 fell 8.5% over just a few days.

"When the funding leg [to the carry trade] reversed, the risk leg had to be liquidated," said Michael Gayed, author of the substack Lead-Lag report. "Markets stabilized within the week, which is precisely why the episode has been so easily filed away as a one-off. It wasn't."

The setup isn't that different today. The Bank of Japan, which meets later this month, could lift its benchmark lending rate from 1%, the highest in three decades, as inflation pressures increase. A softer-than-expected U.S. jobs report in June could set the stage for a July disappointment, and rip out a good portion of the market's hawkish Federal Reserve tenor heading into the autumn months.

Furthermore, if the data aren't ready to support a narrowing of bond yield differentials, direct intervention to address yen weakness from the Ministry of Finance just might. The MoF has spent more than $220 billion defending the yen over the past four years, each time seeing the money effectively wasted as the efforts failed to last for more than a few weeks. The yen has fallen more than 16% against the dollar since the first round of intervention in the autumn of 2022 despite the BoJ rate hikes.

That likely proves that market forces, which have taken 10-year JGB yields to their recent multidecade highs, could be far more effective than intervention. But they also come at a cost elsewhere. Japan's life insurance and pension companies sit on a staggering $1.2 trillion in Treasuries, the highest foreign holdings in the world, and signs of a structural retreat are already showing. Japanese investors yanked nearly $30 billion out of U.S. government, agency, and municipal debt in the first quarter of this year alone -- the sharpest quarterly selloff since 2022.

For Albert Edwards, global strategist at Société Générale, Japan removing its thumb from the scale of the bond market is a major concern for a U.S. stock market, which remains historically expensive.

"Do you really think the U.S. equity market can sustain a 20 times+ forward price to earnings multiple if 10-year Japanese government bonds continue their upward trajectory and converge to the U.S. at 4% levels?" he asked rhetorically in a recent client note. "I don't."

The stock market could get an answer soon.

Write to Martin Baccardax at martin.baccardax@barrons.com

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July 09, 2026 12:44 ET (16:44 GMT)

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