Japan's $1.2 Trillion Treasury Problem: What the Yen's 40-Year Low Means for Global Markets

Carry trade dynamics. Investors continue to borrow yen at ultralow rates and invest in higher-yielding dollar assets, creating structural selling pressure on the yen. These positions are enormous — and fragile .

Domestic headwinds. Yields on Japan’s 40-year government bonds hit record highs in early 2026, and domestic political uncertainty (including a snap election called by Prime Minister Takaichi) has further eroded confidence in the yen .

The $1.2 trillion question: What Japan does with its US Treasuries

Japan is the largest foreign holder of US Treasuries, with roughly $1.2 trillion in US government debt at the end of 2024 . This portfolio is now at the center of global market risk.

If Japan intervenes to support the yen, it likely sells Treasuries. In May 2024, Japan’s foreign securities holdings dropped by $50.4 billion, indicating it sold US government bonds to finance a record ~$63 billion currency intervention — a move that drew scrutiny from Washington . If Tokyo intervenes again at scale, analysts expect another round of Treasury sales, pushing US yields higher and adding to supply pressure from ongoing Treasury auctions .

Even without official intervention, the structural demand for US bonds is shifting. Japanese institutional investors (pension funds, insurers, banks) are the world’s largest cross-border buyers of US bonds. But a persistently weak yen erodes the hedged returns on US Treasuries for these investors, giving them an incentive to repatriate capital or shift into higher-yielding domestic Japanese government bonds (JGBs) . The 10-year JGB yield has risen to around 2.3%, making Japanese bonds more competitive with US Treasuries for the first time in decades .

As TD Economics puts it: “Japan’s rate normalization is reducing outward investment by domestic investors, especially insurers and pensions, withdrawing a key source of stable, long-duration demand for U.S. Treasuries.”

The carry trade unwind risk: 2024 redux?

The biggest flash crash risk comes from the yen carry trade. When the yen suddenly strengthens — triggered by intervention, a surprise BOJ hike, or a broader risk-off event — leveraged carry trades unwind violently, as they did in August 2024.

That month, the yen surged over 10% in days, the S&P Global Broad Index dropped 3.3% in a single day, the Mexican peso and Australian dollar plunged, and US Treasuries saw extreme volatility . The Bank for International Settlements (BIS) documented that yen-funded carry trades had reached historical peaks of around ¥2 trillion before the unwind . Analysts at UBS and Barclays warned the unwind “still has room to go” and remains a systemic risk .

In 2026, with carry positions still substantial and the yen at a 40-year low, the risk of another violent unwind is elevated. Finance Minister Satsuki Katayama has repeatedly warned of action against “extreme fluctuations,” and markets are bracing for a possible repeat of the August 2024 shock .

Broader global implications

• Higher US Treasury yields. Any sustained sell-off of US bonds by Japan would push yields higher worldwide, raising borrowing costs for governments, corporations, and households .
• Tighter global financial conditions. A strong dollar and rising US yields typically tighten financial conditions in emerging markets, where dollar-denominated debt becomes more expensive to service.
• Geopolitical friction with Washington. Large-scale Treasury sales by Japan would not be welcomed by the US Treasury Department. In early 2026, Treasury Secretary Scott Bessent cautioned Japanese officials that instability in Japan’s bond market could affect Treasuries .
• Competitive devaluation pressure across Asia. A weaker yen pressures export competitors like China and South Korea to respond with their own currency policies, potentially triggering a broader currency war .

Bottom line

The yen at a 40-year low is not a Japan-only story. The most direct transmission to global markets runs through Japan’s $1.2 trillion US Treasury portfolio. Whether through intervention-funded Treasury sales or a structural retreat by Japanese investors from US bonds, the world’s largest foreign holder of US debt is becoming a source of risk for the Treasury market. Any escalation — via carry trade unwind, official intervention, or both — could push US yields higher, tighten global financial conditions, and ricochet through equities, EM currencies, and credit markets worldwide.