Rory Green of GlobalData TS Lombard gave the Journal the line of the week: “The yen supertanker is turning.” It is a good image because supertankers do not turn quickly, and because when they finish turning, everything in the channel has to move.
On Friday the Bank of Japan raised its benchmark rate to 1.25%, the highest since 1995, and said more increases are coming. The decision followed Wednesday’s Fed increase and a public campaign by Treasury Secretary Scott Bessent urging Japan to raise borrowing costs. The yen actually weakened on the news — two dissenters suggested future rises might come more slowly than investors expected — and the dollar rose 1.2% to 157.83 yen. Other central banks are expected to follow as the war in Iran feeds inflation.
Why a rate decision in Tokyo is a mortgage story in California
For years, low rates at home sent Japanese money abroad. Investors vacuumed up Treasurys and European government bonds; banks borrowed cheaply in yen to lend overseas and pocketed the difference. Japanese investors now own around $2.5 trillion of U.S. stocks, bonds and other assets — about half of the country’s $5 trillion in overseas holdings. Japan is the largest foreign holder of Treasurys, at roughly $1.1 trillion as of July.
That figure is already down from a $1.2 trillion peak in February, before Tokyo began selling to prop up the yen. Bessent, in a rare joint intervention with Japan, suggested that in future Tokyo should borrow dollars from the Fed rather than sell down its Treasurys — which tells you how much Washington would prefer that particular buyer stay a buyer.
The Government Pension Investment Fund, which manages more than $2 trillion for Japanese workers, once parked around 60% of its assets in Japanese government bonds. Today domestic bonds are about a quarter of the portfolio; it holds around $240 billion of U.S. government bonds and its largest foreign stocks are Nvidia (NVDA), Apple (AAPL) and Microsoft (MSFT). Japan’s finance minister has said she would like to see it invest more at home. Officials say no decision has been made. The direction of the pressure is not in doubt.
The arithmetic for the 10-year
A buyer who stops buying does not have to sell to matter. If the marginal Japanese dollar that used to go to Treasurys stays in a 3% Japanese government bond instead, the U.S. Treasury has to find that dollar somewhere else, and the price of finding it is a higher yield. The Journal’s own line is measured: Japanese investors souring on Treasurys “would add to upward pressure on yields.” It arrives on a week when the U.S. 10-year touched 5% for the first time since 2007 and the Bloomberg long-Treasury index yielded 5.36%.
This is the fourth reason in the September letter — the bond market voting with its feet — with a passport attached. Norway’s sovereign fund asked in September to cut government bonds from 70% of its bond book to 50%. Now the largest foreign holder has a domestic alternative worth holding for the first time in thirty years.
Our read
Nothing here is a forecast of where the 10-year goes next week. It is an explanation of why 5% is not obviously a ceiling: the demand side of the Treasury market has fewer patient buyers than it had, and one of the most patient just got paid to stay home. For the desk, that is the argument for owning short bills and floating-rate paper that reset with the Fed rather than long bonds that reprice with the world’s appetite — and it is why the Risk Atlas square marked “rate risk” is still the one we watch most carefully.