Japan rate pivot means higher US bond yields

NEW YORK – The Bank of Japan’s December 20 decision to lift the cap on 10-year government bond yields to 0.5% from 0.25% looks on the surface like a minor tweak of monetary policy. In reality, it’s a hairline crack in the biggest dam in world financial markets.

Japan is the world’s number one creditor, a massive exporter of capital to the United States and other borrowing countries. Now the Bank of Japan wants to bring Japan’s money home to finance a massive government deficit that will be aggravated by a 50% rise in defense spending over the next five years.

That implies higher bond yields in the United States, which can’t count on the Japanese bid for its government bonds during the next several years.