Japan's Bond Market Collapse
A Warning Signal for Global Debt Markets
Japanese culture has always fascinated me. From kintsugi, the art of repairing broken pottery with gold, to the quiet beauty of wabi-sabi, which celebrates imperfection, and the profound simplicity of finding life's purpose through ikigai, Japan offers invaluable lessons on resilience and meaning. These philosophies have deeply influenced my thinking on leadership and life.
But lately, there’s one part of the Japanese tradition I’m not such a fan of: its bond market—and more specifically, what it might do to the rest of the global economy.
Last week in The Debt Wall Is Here, I warned about the $9.2 trillion in U.S. government debt that’s maturing this year. That article laid out the hard math and market dynamics we’re now staring down. But what’s happening in Japan makes it worse. It doesn’t just echo the same warning. It amplifies it.
The unraveling of Japan’s bond market isn’t some distant financial event. It’s a flashing red light. It’s what happens when a country tries to ride debt and low rates forever in a world that’s stopped playing along.
The Debt Wall is no longer theoretical. It’s being built—and breached—in Tokyo.
A Short History of a Long Low
To understand what’s happening, you have to understand what Japan has been doing for the past three decades.
After the collapse of its asset bubble in the early 1990s, Japan entered a long, grinding period of deflation. Prices fell. Growth stagnated. Consumer spending dried up.
In response, Japan did what modern monetary thinkers said to do: they pushed interest rates to zero. Then they bought bonds. Lots of them.
The Bank of Japan was the first major central bank to go full-throttle on quantitative easing. It was also the first to introduce yield curve control, a policy designed to pin interest rates in place. By 2016, the BOJ wasn’t just buying short-term debt—they were buying everything, including 40-year government bonds. At one point, they owned more than half of the entire Japanese government bond market.
Japan became a living experiment in Modern Monetary Theory. For years, it seemed to work. Inflation stayed low. Bond yields stayed anchored. Debt soared to 260% of GDP—by far the highest in the developed world—and the market barely blinked.
That era is over.
What’s Happening Right Now
In May 2025, Japan’s 30-year and 40-year bond yields exploded to levels not seen in decades.
The 30-year yield jumped to 3.14%
The 40-year surged to over 3.6%
For context, these yields were under 1% just a few years ago. For a country like Japan, that’s not just a rate spike. It’s a market rebellion.
Why now?
Because all the cracks in the system finally lined up at once:
Inflation is rising. Consumer prices in Tokyo jumped over 3.4% last month, far above the Bank of Japan’s 2% target.
The BOJ is backing away. Governor Ueda has stopped capping yields the way his predecessors did. Japan ended its negative interest rate policy. Yield curve control is effectively gone.
Foreign investors are fleeing. Domestic investors are nervous. And a recent 20-year bond auction failed catastrophically—a sign that confidence is evaporating.
And most damning of all? Prime Minister Shigeru Ishiba just stood in front of the Japanese Parliament and said the quiet part out loud: Japan’s fiscal situation is now worse than Greece’s.
That one statement set off a chain reaction. It triggered more selling. It spooked international bondholders. And it forced everyone to start asking a question they’ve avoided for years:
What if Japan isn’t immune?
Why This Matters Globally
Japan isn’t a small island economy anymore. It’s the third-largest in the world. And more importantly, it’s the largest foreign holder of U.S. Treasuries—with over $1.1 trillion in American government debt on its books.
So when Japan’s bond market blows up, the impact isn’t confined to Tokyo. It hits Washington. It hits Wall Street. It hits every regional bank in America with a portfolio full of long-duration bonds.
Let’s unpack that.
First, rising Japanese yields mean that Japanese investors no longer need to go abroad to get decent returns. For decades, they’ve been a reliable buyer of U.S. Treasuries. That buyer is now leaving the room.
Second, there’s a growing risk that Japan starts selling U.S. debt to defend its currency or stabilize its own bond market. Even just a hint of that—as we’ve seen in recent statements by Japan’s finance ministry—can rattle the U.S. Treasury market.
Third, the same pressure that’s hitting Japan is now coming for us. Rising yields. Ballooning deficits. Diminished faith in central bank control. A weaker global bid for our debt.
That’s exactly what I warned about in The Debt Wall Is Here. What Japan shows us now is that the timeline has accelerated.
The Link to the U.S. Debt Wall
In my earlier piece, I pointed out that $9.2 trillion in U.S. debt is maturing in 2025. That’s nearly a third of all publicly held government debt. And it all needs to be rolled over—at much higher rates than it was originally issued.
At the time, I said that even if the Fed cuts, long-term rates might not fall. Why? Because supply is overwhelming demand. Because markets are losing faith in fiscal discipline. Because global capital is looking elsewhere.
Now we have proof.
Japan is showing us what happens when the world’s most indebted country meets a bond market that won’t cooperate. It’s a slow-motion version of what could happen here—except our debt maturity wall is hitting now.
Think about it:
Japan’s debt-to-GDP is 260%. Ours is pushing toward 130% and rising fast.
Japan had the BOJ propping up its market. We have the Fed shrinking its balance sheet.
Japan’s bond market cracked after a few weak auctions and a political misstep. What happens when the U.S. hits a string of soft Treasury sales and gets downgraded again?
What Japan is telling us is that the bond market does not have infinite patience. Not even for rich countries. Not even for central banks that used to be invincible.
Implications for U.S. Regional Banks
I’ve said it before: regional banks are the canaries in the coal mine.
They hold long-dated Treasuries and mortgage-backed securities. When yields rise, the market value of those assets falls. That’s not a theoretical loss. That’s the kind of thing that blew up Silicon Valley Bank.
Japan’s bond blowout is now feeding into that cycle. As Japanese yields rise, so do U.S. yields. The 10-year Treasury is hovering around 4.9%. The 30-year is above 5%.
That’s punishing for banks who are still sitting on unrealized losses. Those losses widen. Liquidity tightens. And regulators get nervous.
We’re already seeing whispers of more bank consolidation. More stress in commercial real estate. More pressure on deposit flight as savers chase better yields.
This isn’t just a monetary story. It’s a credit story. And Japan’s experience is turning up the heat.
The Trap Japan—and Maybe the U.S.—Is In
The trap is simple:
You borrow like rates will stay at zero forever.
Then inflation picks up.
Then rates rise.
Then your interest expense balloons.
Then your central bank has to either let yields run wild or start monetizing again.
Either way, confidence breaks.
Japan is living that cycle in real time. The BOJ tried to step back. Markets panicked. Now they’re stuck.
They can’t afford to keep buying bonds at scale (it weakens the yen and fuels inflation). But they also can’t afford to stop (the bond market is cracking).
The U.S. is getting close to that same decision point.
If the Fed cuts too aggressively, they risk fueling inflation and spooking Treasury markets. If they don’t cut, they risk hurting regional banks and tanking growth.
There are no easy answers. Just hard math and harder tradeoffs.
What Comes Next
I don’t know if Japan’s bond market collapse will be the trigger for a broader global crisis.
But I do know this: it changes the game.
It shows us that markets are waking up. That central banks can’t always protect us. That deficits matter when they intersect with inflation and a loss of confidence.
It also shows us how interconnected everything has become. A failed auction in Tokyo can spike yields in New York. A political misstep in Japan can rattle portfolios in California.
The Debt Wall is no longer an abstract idea. It’s becoming a lived reality.
And if we’re paying attention, Japan is giving us the warning shot.
The question is whether we’ll heed it—or repeat it.
Final Thought
The cracks we're seeing in Japan’s bond market aren't just local issues—they're global warning signs. We still have a window of opportunity to change course, to face fiscal realities head-on, and to rebuild trust before our own bond markets deliver a similar wake-up call.
Japan is now demonstrating vividly that debts can't rise indefinitely without consequence, and that confidence, once lost, is extraordinarily difficult to regain. We must heed this lesson, because if we don’t, Japan's current struggle may become our own.