NEW YORK — The moment the US debt crossed US$40 trillion, it stopped being a number and became a gravitational force — one powerful enough to bend Asia’s bond markets, currencies and policy priorities.
Officials in Tokyo know this better than anyone. After decades of wrestling with its own debt‑heavy equilibrium, Japan offers a preview of what happens when a government’s borrowing needs start steering global capital flows rather than the other way around.
It’s one thing for this dynamic to be afoot in Asia’s No. 2 economy. It’s quite another when we’re talking about the globe’s biggest — and the protector of the reserve currency.
The irony, of course, is that central banks and investors spent the first half of 2026 piling into dollars as a safe haven amid the Iran war. Despite the US having started the conflict along with Israel in late February, global funds raced into hyper-liquid US Treasuries.
Yet cracks are appearing fast since headlines earlier this month of the $40 trillion milestone. Last week, US 30-year Treasury yields rose to their highest level since 2007 at 5.3%. That prompted Treasury Secretary Scott Bessent’s team to declare war, essentially, on bond bears.
Bessent rolled out a Treasury debt buyback program to cap surging yields. Though Bessent’s “twist” gambit is ostensibly modeled after the policies of Nobel laureate James Tobin during the John F. Kennedy administration in the 1960s, it has serious Japanese echoes — and not good ones.
The narrative quickly shifted from Bessent bending markets to Trump World’s will to the “bond vigilantes” handing the US Treasury its comeuppance. Famed investor Stanley Druckenmiller took to the Wall Street Journal to slam Bessent’s gamble. “Governments defending prices against fundamentals always lose,” he warned.
Here, Japan is Exhibit A. Since the late 1990s, one government and Bank of Japan team after another has declared war on bond bears. By 1999, the effort had the BOJ slashing official rates to zero. Next, Tokyo pioneered quantitative easing in 2001. Since then, Japan has unleashed countless financial sorties to battle investors bidding bond yields higher.
In 2013, the BOJ supersized its balance sheet. Over the next five years, it gorged on Japanese government bonds (JGBs) and stocks until its balance sheet topped the nation’s $4.2 trillion economy.
During that period, in 2016, the BOJ experimented with yield-curve-control (YCC) tactics. It also introduced quantitative and qualitative monetary easing (QQE) and intensified its negative interest rate policy (NIRP) to keep JGB yields under wraps.
The tactic has been a short-term success but a long-term disaster. No doubt, it’s helped Tokyo avoid the meltdown about which traders have JGBs the most obvious “widowmaker” trade anywhere.
Shorting JGBs a dozen-plus years back then didn’t work out well for Kyle Bass of Hayman Capital. Or David Einhorn of Greenlight Capital before that. Officials at Japan’s Ministry of Finance tend to be quite good amidst a crisis.
Since then, though, Japan’s financial excesses and shrinking-population problems have worsened exponentially. In May 2025, when then-Prime Minister Shigeru Ishiba said Tokyo’s deteriorating finances are “worse than Greece,” it was hard for most observers to disagree.
Ishiba was trying to make a more nuanced point, aimed at dissuading lawmakers from cutting taxes to boost gross domestic product yet again. Continuing to do so might draw credit rating companies’ attention to Tokyo’s precarious finances.
Last year, Japan’s population recorded its steepest fall on record — and the fifth straight annual decline. The combination of runaway debt, dismal demographics and a government loosening fiscal stimulus to combat sluggish growth tends to raise alarm bells among credit rating agencies.
Bessent clearly wants to avoid that fate. In the short run, the worry at Treasury headquarters is about the $1.2 trillion of US Treasuries that Japan owns as the biggest holder. Last month’s joint Japan-US yen intervention was largely about eliminating incentives for Tokyo to dump dollars.
The longer-term play here seems to ignore the lessons from Japan’s lost decades. One is that papering over cracks in the bond market is no substitute for slowing debt growth, never mind the scale of the overall debt load. Since January 2025, US President Donald Trump’s administration has devised no plans to reduce a debt-to-GDP ratio that’s now approaching 225%.
Yet there are big questions about whether Bessent sent the wrong signals with his bond twist. The reason markets are having such a violent reaction, says Brookings Institution economist Robin Brooks, is that “they’re extremely attuned to the risk that high-debt governments start fiddling with interest rates.”
Brooks adds that “after all, if investors don’t get paid adequate risk premia, why would they hold your government bonds. Instead, they’ll head for the exit, putting pressure on the currency. Markets have watched Japan closely and learned from it. They’re on the lookout for signs of anything similar happening elsewhere. The buyback announcement – as long-term Treasury yields were making multi-decade highs – therefore understandably got a big reaction.”
The other group Bessent risks trolling is Washington’s top bankers, who could turn against US government debt. In recent years, China, America’s No. 2 financier in Asia, has been advising banks to cut their exposure to US government securities. And perhaps Japan, too.
As Richard Michelfelder, an economist at Rutgers University, says, recent market intervention efforts “help keep US rates down. Japan holds many hundreds of millions of dollars in US Treasury bonds. If they have to sell some to buy yen, that will come back to bite us.”
Paolo Pasquariello, a finance professor at the University of Michigan, told ABC News that “a perfect storm is motivating Japan to seek a stronger yen.” “The other side of the coin: A stronger yen is beneficial to the US,” he added.
But a more stable US bond market benefits the world. Posterity may show that it wasn’t the US Congress, the judiciary or voters that forced the US president into a more relational economic policy. It was bond traders and Asian central banks.
Central banks in this region hold more than $2.5 trillion of Treasuries, with Japan and China, the top holders, sitting on a combined $1.8 trillion. If they were to stop buying, who could pick up the slack? Arguably no one.
That’s why chatter among bond traders that Japan, China and other Asian monetary authorities might sell has alarmed top Treasury officials. For years, traders feared China might dump Treasuries. The question is whether that day is coming soon.
Take China, which is in the throes of high-stakes trade negotiations with Washington. President Xi Jinping’s government has strong incentives to show “it won’t hesitate to cause turmoil in the global financial market in order to improve its negotiating power against the US,” says Ataru Okumura, strategist at SMBC Nikko Securities.
There’s a reason Bessent’s efforts to cap bond yields are flopping: they smack more of panic than strength. The years Bessent spent working in hedge fund circles should be coming in handy these days. For all Trump’s public bluster, another Long-Term Capital Management-level crash could be catastrophic for global markets.
LTCM’s 1998 collapse was partly due to surging Treasury debt yields. Triggering a repeat in 2025, with Trump’s tariffs upending all asset classes and China flirting with deflation, could make the 2008 Lehman Brothers crisis look tame by comparison.
Yet the risk that Trump’s policies might repel Asian central banks is growing. The idea that US Treasuries are the premier safe-haven asset can no longer be taken for granted. Hence the jump in gold, an asset that Trump’s policy chaos is making great again. The precious metal is trading at nearly $4,700 an ounce after a recent plunge amid the Iran war.
This fragility of US Treasuries is creating a unique leverage point for the BOJ, the People’s Bank of China and other top Asian monetary authorities. Asia’s main leverage over Washington right now is bonds, currencies and services trade. This latter piece refers to America’s deep dependence on Asian markets for financial services, technology and intellectual property.
The mechanics of Trump’s trade war suggest an imperfect understanding of the US economy’s Asia-related vulnerabilities. Bond traders, the kinds that take matters into their own hands when a government’s policy mix seems out of whack, are all over the debt and currency realms.
Events in 2026 echo what James Carville, former strategist for US President Bill Clinton, said about his hopes of being reincarnated as the bond market. “You can intimidate everybody,” he quipped.
This was back during balanced-budget negotiations. At the time, debt investors were hypersensitive to the slightest hint, good or bad, about zigs and zags in Washington’s fiscal policy debates.
Today, with the US national debt twice the size of China’s $20 trillion economy, Asia has just cause to worry about Washington’s fiscal health and continuing to hold US Treasuries.
Follow William Pesek on X at @WilliamPesek
