In August 2024, a small 0.25% rate hike from the Bank of Japan was enough to knock the S&P 500 down 6% in a month. That happened when leverage was lower, Japan was more stable, and policy was far more predictable.
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The basic setup hasn’t changed:
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For decades, global investors borrowed yen at extremely low rates and used that cheap money to buy U.S. stocks, bonds, crypto, and emerging-market trades. When the yen suddenly rises — or Japan tightens policy — those positions lose money fast and investors are forced to sell.
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What has changed is the scale of the pressure building now.

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1. Japan’s long-term bond yields are hitting record highs.
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The 20-year and 40-year bonds have been selling off sharply and are on track for their worst year since the 1970s.

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2. The yen and long-term bonds are falling at the same time.
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Deutsche Bank notes that both the currency and long bonds have dropped more than 5% in weeks. When a country’s currency and bonds break down together, it usually signals a loss of confidence at home — not just global volatility.

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3. Japan is pushing forward a huge new spending package into a stressed bond market.
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The government is preparing roughly ¥17.7 trillion ($112B) in new spending, with the total economic impact close to ¥42.8 trillion. But this comes as Japan’s debt sits near 230% of GDP, the highest of any major economy, and just after GDP shrank 1.8% last quarter.
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Bond yields are rising because the market is signaling:
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“We don’t want more debt at these levels.”

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4. Retail traders in Japan are extremely leveraged.
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Nearly 900,000 lira-yen margin contracts are outstanding — near an all-time high — because the trade offers over 30% annualized yields. If the yen jumps suddenly, these positions unwind violently.

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5. Japan–China tensions are rising fast.
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China is warning its citizens away from Japan, airlines are canceling flights, tourism stocks are falling, and diplomatic pressure is increasing. This adds another layer of stress on an already fragile economy.