Japan owes more relative to the size of its economy than any government on Earth at over 250% of GDP. For 30 years that didn’t matter, because Tokyo could borrow almost for free. Now the bill is arriving.
Benchmark yields just hit 3%, a level the finance ministry never budgeted for. The move is rattling global markets, and sharp swings in the yen have an outsized ability to shake financial systems worldwide.
The plot thickens because US Treasury yields seem to be racing Tokyo’s higher. The 30-year US Treasury yield recently jumped to two-decade highs near 5.3%.
Inflation fears are driving both moves. With the war in Iran dragging on and oil above $95 a barrel, bond bears have the wind at their backs. Just as powerful a driver: fiscal policy gone slack, and central banks that increasingly look behind the curve on tightening.
An added wildcard is how US-Japan yield dynamics have become entangled in geopolitics between Washington and Tokyo, raising the stakes for world markets.
This week, US Treasury Secretary Scott Bessent escalated his months-long campaign pressuring the Bank of Japan to raise rates — the logic being that if he and President Donald Trump can’t get their way with the Federal Reserve, pushing Japanese rates higher is a workable Plan B.
As Group of 20 officials gathered in North Carolina this week, Bessent called on BOJ Governor Kazuo Ueda to “do the right thing” on monetary policy to reverse the yen’s slide to 40-year lows.
On August 31, Bessent told CNBC: “I have information that the market doesn’t have. And it’s my belief that the Japanese government and the BOJ will do the things that will lead to a stronger yen.”
That followed a joint Treasury-Tokyo operation to stabilize the yen — the first such coordinated move since 1998, driven partly by fear that Prime Minister Sanae Takaichi’s government might sell US Treasuries to fund its own intervention. Japan holds more US government debt than any other country, over US$1.1 trillion, so Washington took pains to sell euros rather than dollars to buy yen, sidestepping that risk.
Bessent then tried a Japan-style tactic: capping yields through large-scale government bond buybacks, hoping purchases of at least $4 billion per operation would push borrowing costs down. Markets haven’t cooperated.
The yen is back near 160 to the dollar, and long-term US yields are climbing again. “The bond market appears to be completely ignoring the US Treasury,” says market commentator The Kobeissi Letter.
The dynamic should unsettle a Treasury Secretary who cut his teeth in hedge funds and has seen firsthand how fast a yield spike can rattle markets, and how quickly an unwind of the yen carry trade can destabilize the global system.
Bessent worked for George Soros in the early 1990s when Soros’s short position famously “broke the Bank of England.” And the same team was later blamed for crashing currencies in Hong Kong and Malaysia during the Asian financial crisis.
Bessent’s market instincts are being tested in real time, and his fiscal management isn’t exactly inspiring confidence in the dollar — not with US national debt above $40 trillion, or roughly $117,000 per person.
Under Bessent’s watch, the US debt-to-GDP ratio stands at 125%. For comparison, economist James Lindsay of the Council on Foreign Relations notes that the massive borrowing that financed America’s World War II effort only pushed debt-to-GDP to 106%.
The trend is worse than that comparison suggests. The nonpartisan Congressional Budget Office projects this fiscal year’s federal deficit will hit $2.1 trillion — about 6% of GDP. As Lindsay puts it, this is happening “at a time of near-full employment when the government balance sheet should be improving, not deteriorating.”
The 2021–2025 Biden administration bears its share of blame for the run-up in spending, but Bessent’s tenure will be remembered for milestones of its own — including a fiscal year in which the US paid more than $1 trillion in interest on its debt, comparable to annual defense spending.
The trajectory is what worries analysts. The Peterson Foundation projects interest payments will more than double over the next decade, and Lindsay and others think even that estimate may be too optimistic. Rather than address the underlying debt problem, Bessent has leaned on gimmicks like bond buybacks—treating symptoms, not the disease.
Even his former mentor, investing legend Stanley Druckenmiller, panned the approach, arguing that “a credible fiscal package would do more for the long end of the curve than a buyback program a thousand times this size.” No such fiscal package appears to be forthcoming from the Trump White House.
It’s not just the US, of course — the surge in long-term bond yields is a global phenomenon. “The confrontation between bond markets and policymakers is becoming a battle of attrition,” says Geoffrey Yu, a strategist at BNY. “Persistent inflation, fiscal concerns and energy risk continue to push investors to demand greater compensation.”
Still, the dollar is the epicenter of the problem. The real risk is that the central banks who effectively serve as Washington’s bankers lose confidence in Bessent’s approach — a group that includes not just the BOJ but the People’s Bank of China, which holds $633 billion in US Treasuries.
Thirty-year Treasury yields have now stayed above 5% for 55 straight days, the longest such stretch in 20 years, and in mid-August the Treasury sold 30-year bonds at the highest rate in 25 years — a clear sign investors are demanding more compensation to keep financing Washington’s deficit.
US Treasury investors “remain reluctant to add duration,” notes Bank of America strategist Meghan Swiber. Michael Stanczyk, a debt portfolio manager at Allspring Global Investments, agrees long-term yields could keep climbing “as investors continue demanding greater compensation for inflation and fiscal risks.”
The trend line is what should worry investors most: US government debt has grown by a third in under five years. With the Iran war adding to inflation pressure, the odds are rising that the Federal Reserve will need to raise rates again as soon as its September 16 meeting — with more hikes potentially to follow.
That sets up a collision with the Trump White House. Trump pressured the Fed throughout his first term (2017–2021), but his second term has escalated things dramatically. First, by trying to fire or indict former Fed Chair Jerome Powell. Then by moving to remove Fed Governor Lisa Cook and stacking the Fed board with loyalists, including White House economist Stephen Miran.
A politicized Fed could be a nightmare for global markets, especially given ongoing efforts by other nations to reduce reliance on the dollar and US Treasuries. The danger is that Trump’s approach spooks the officials in Tokyo and Beijing who, between them, hold more than $1.7 trillion in US government debt.
It’s hardly reassuring that Bessent seems in denial about America’s vulnerabilities. On Sunday, he told Reuters, “I’m not sure where the bond market turmoil is,” arguing that the US bond market is the “best performing” globally this year, and adding that “what’s important, too, is that we are growing.”
Bessent also defends his interventions as less aggressive than past ones by former European Central Bank President Mario Draghi or former BOJ Governor Haruhiko Kuroda. He said: “They didn’t seem to have a problem when Mario Draghi did it in Europe. They didn’t seem to have a problem when the Japanese bought up half their bond market.”
Bond markets are cracking globally as geopolitical, technological, and demographic pressures collide. Borrowing costs are hitting multi-year highs from Washington to London to Tokyo, and elevated yields look here to stay.
Nowhere more so than Japan. The global selloff has put Tokyo in an uncomfortable spotlight, raising fears that “this time is different.” For now, the $32 trillion US Treasury market is drawing most of the attention. US 30-year yields are the highest since 2007 — above the 5% “line in the sand” investors thought would hold, notes Ed Al-Hussainy of Columbia Threadneedle.
Yet Tokyo is flashing its own warnings, says Brookings economist Robin Brooks: “Japan has been in a slow-motion blow-up of exactly this kind for two years.” He adds that “Liz Truss”-style selloffs are becoming common across the G10 as debt rises and institutional trust erodes — blurring the line between G10 and emerging markets.
The tremors in Japan could matter most in the short term. Yields are climbing as the yen tests 160 to the dollar, and the jump in 10-year JGB yields is especially troubling given Japan’s debt load and shrinking population.
US parallels with Japan are becoming harder to miss, though. Japan proved a heavily indebted country could borrow cheaply so long as markets kept faith — and that faith is cracking. Washington is running up a similar tab, betting its version of that privilege is unstoppable. That bet might not hold.
Follow William Pesek on X at @WilliamPesek
