What Japan’s Bond Shock Could Mean for US Investors

Rumors are circulating in the financial media that the US will soon join the Bank of Japan in supporting the Japanese yen. On the Jan. 26, 2026, episode of The Morning Filter podcast, Morningstar Chief US Market Strategist Dave Sekera talked about why the recent movement in Japanese government bonds and the yen should be on the radar of US investors. Here’s an excerpt from the episode.

Weakening Japanese Bonds and Yen: A Key Risk for 2026

David Sekera: In the outlook, we also highlighted that the potential for ongoing weakening of Japanese government bonds and the Japanese yen was a key risk for this year. Both have already been on a long-term weakening trend, but the risk is if that weakening were to accelerate. And that’s what we saw last Tuesday. For example, 10-year Japanese government bonds hit 2.35%. Comparatively, they were only 1.00% a year ago. Those bonds have a duration of over 9. What that means is that for every 100-basis-point change in yield, you can get an increase or decrease in the price of those bonds by about 9%. On the longest end of the curve, the 40-year Japanese government bond, that hit 4.25%. Those bonds on Tuesday widened up 23 basis points just that one day. That’s 175 basis points wider than where those bonds were a year ago. Because those bonds have such a long maturity, they also have a very high duration. The duration here is about 22. So, essentially, that means, for every 100-basis-point change in the yield of those bonds, that’s about a 22% gain or loss. Last Tuesday, based on that yield movement, that’s a 5% loss in just one day.

Now, to put this overall in context, globally, the amount of Japanese government bonds outstanding is $8.4 trillion in US-dollar terms. So, any movements there really have some outsize impacts globally. We did see a rebound in those Japanese government bonds on Wednesday, and they’ve actually been strengthening ever since, and we see even more strengthening this morning. The real question, I think, for investors is whether this is real buying by investors, or is this just Bank of Japan interventions. I think it’s just the Bank of Japan interventions for now.

Susan Dziubinski: Dave, talk a little bit about how important the performance of Japanese government bonds is for US investors. Is this something that we should be having on our radars?

Sekera: I’m certainly keeping it on my radar. And there are really two systemic risks that could occur here if Japan and the Bank of Japan lose control of those bonds and the prices.

The first would be the potential for the carry trade to unwind. People may not know what the carry trade is, but essentially, a lot of hedge funds would borrow in yen because the interest rates were so low, and then be able to reinvest those proceeds in foreign-denominated assets. So, if it’s no longer cheaper to borrow in yen, they may look to unwind that trade, which means they’re going to be selling those foreign-denominated assets to repay the Japanese-denominated debt.

The other one would be solvency. I think the concern here could be the solvency of Japanese insurance companies and banks. Of course, the decrease in bond prices would then lead to lower capital levels at the banks, which could then lead to concerns about credit counterparty risk. To some degree, it could be similar to what happened in March 2023. That’s when Silicon Valley Bank went insolvent because US interest rates rose very quickly. They had a lot of long-duration assets on their balance sheet. So, even though they were in held-to-maturity accounts and didn’t actually have to recognize those losses. Everybody knew that there were big holes in their balance sheet.

Also, if it’s not a solvency issue, I think it just reduces the ability of the Japanese banks to be able to lend, which would then also impair the Japanese economy. As I think they’re still like the third- or fourth-largest economy in the world, certainly could have some global repercussions just from that alone.