Big in Japan

Japan holds roughly $5 trillion in foreign assets. The US alone accounts for ¥342 trillion in bonds and equities.

Japanese 30-year yields sat below 1% from 2019 through early 2024. They're now above 3%. The yield spread between developed market bonds and JGBs has collapsed from 400 basis points to roughly 100. The carry trade that defined Japanese institutional behavior since the 1990s, borrow cheap at home and invest abroad for yield, suddenly added has friction.

Japanese life insurers and pension funds have duration-matching obligations. If domestic yields offer adequate returns with lower currency risk, the marginal incentive to hold Treasuries weakens. GPIF, the world's largest pension fund, doesn't need to reach for yield in US credit markets when JGBs pay 3%.

This doesn't mean Japanese investors dump everything tomorrow. Institutional rebalancing is glacial. Currency hedging costs matter and existing positions have different maturity profiles. Treasury market depth has deteriorated since 2020. Primary dealers hold smaller inventories. Liquidity provision is thinner. A sustained seller of size, which Japanese institutions would be, arrives into a market less equipped to absorb flow than at any point since the GFC.

The second-order effects compound. Japanese selling pressures Treasury yields higher. Higher yields strengthen the dollar near-term but raise US borrowing costs. If Japan's repatriation triggers broader reserve manager concern about duration exposure, the feedback loop accelerates.

The consensus view remains that Japan is trapped. Any meaningful tightening implodes JGB markets where the BOJ owns half of outstanding supply. But the data suggests something else. Yields are rising, volatility is elevated, and the market is absorbing it. The trap might be less binding than assumed.

The yen carry trade unwound violently in August 2024 and the S&P dropped 6% in three days. That was positioning adjustment. Repatriation of actual assets would be slower but larger.

When a $5 trillion portfolio starts rebalancing toward domestic assets, you don't need to predict the timing. You need to be positioned for a situation where the marginal Treasury buyer becomes a marginal seller. What happens in Japan doesn't stay in Japan.