A yellow warning light is now flashing over America’s financial markets. Excessive Treasury issuance has been driving up long-term interest rates. This could lead to a sharp decline in Treasury prices, a fiscal crisis, and a loss of confidence in the dollar. It could also trigger a stock-market crash, severely reducing the wealth of America’s middle class.
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Treasury Secretary Scott Bessent has been quite openly pressing Japan to raise interest rates. This also amounts to telling Prime Minister Sanae Takaichi to put the brakes on “Takaichinomics.”
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At first sight, this seems strange. If the Bank of Japan raises rates, Japanese investors may shift some of their money out of U.S. assets and back into Japan. That could put additional upward pressure on long-term U.S. interest rates.
Yet Bessent has not changed his position.
He may be thinking as follows. If the yen is allowed to depreciate further, the eventual reversal—perhaps triggered by a Bank of Japan rate increase—could be extremely abrupt. Money would then rush out of the United States and back into Japan, sending U.S. interest rates sharply higher and Treasury prices lower.
Presumably, Bessent wants the yen’s decline to be reversed gradually.
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But It Is Difficult to Move Financial Markets “Gradually”
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The 1985 Plaza Accord was intended to produce a controlled depreciation of the dollar through coordinated action by the Group of Five—the United States, Japan, West Germany, France, and Britain.
But once the market started moving, it rushed in one direction like an avalanche. The dollar averaged about 237 yen in August 1985, immediately before the agreement. One year later, in August 1986, it averaged only 154 yen.
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If the Bank of Japan raises rates now, its intention may be to produce only a gradual adjustment. The market, however, may again turn into an avalanche.
Bessent may already be behind the curve. By continuing to apply pressure after the most favorable moment has passed, he could inadvertently help set off precisely the violent market reaction he wants to avoid.
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The Yen Is More Dangerous Than It Looks
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This may sound exaggerated. But it is worth remembering that the yen has long played a substantial role in American financial markets.
For many years, investors have borrowed low-interest-rate yen, converted the money into dollars, and purchased higher-yielding U.S. Treasuries, other bonds, and stocks. This is the classic “yen carry trade.”
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Alongside it stands a much larger flow of Japanese long-term savings into foreign securities. This is not necessarily a carry trade in the strict sense, because the money is not always borrowed. Nevertheless, both kinds of investment have helped sustain demand for American financial assets.
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Both Japanese and Foreign Investors Participate
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The carry trade itself adds to downward pressure on the yen. As the yen depreciates, food and other imported goods become increasingly expensive in Japan. Japan’s economy also appears to shrink when its GDP is measured in dollars.
So who is engaging in this yen carry trade?
If foreigners are doing it, one is tempted to become indignant. If Japanese investors are doing it, one might feel inclined to publicly condemn them.
But the conclusion is rather prosaic: both Japanese and foreign investors are participating.
Their basic motive is the same: holding higher-yielding dollar assets has generally been more profitable than holding low-yielding yen assets. To that extent, Japanese investors themselves have contributed to the yen’s seemingly endless depreciation.
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How Large Is It?
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It is difficult to define precisely what should be counted as a “yen carry trade.”
Some cross-border investments appear in Japan’s balance-of-payments and international-investment statistics. Other transactions—particularly derivatives, foreign-exchange swaps, and off-balance-sheet positions—are recorded only partially or appear in entirely different sets of statistics. Some private positions cannot be identified at all from publicly available data.
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The first category includes purchases of U.S. Treasuries and other foreign securities by Japanese financial institutions, such as Japan Post Bank, the Government Pension Investment Fund, the Norinchukin Bank, life insurers, major commercial banks, and regional banks.
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The second category includes foreign-exchange transactions, swaps, derivatives, and leveraged positions held by banks, hedge funds, proprietary trading firms, and other investors.
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According to the Bank for International Settlements, global trading in the dollar-yen currency pair averaged roughly $1.37 trillion a day in April 2025 (please note that this is turnover in both directions—including spot transactions, forwards, swaps, and options—not the outstanding size of the yen carry trade). Some positions are highly leveraged. Consequently, their effect on markets can be several times greater than the amount of capital originally committed.
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If Japanese institutional investors begin repatriating funds at the same time as leveraged carry positions are being unwound, U.S. long-term interest rates could move substantially. Under severely disorderly conditions, a movement of tens of basis points cannot be ruled out (though, no reliable single estimate exists, because the underlying positions are not fully observable).
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Japan’s Large Financial Institutions Matter
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Investment by Japanese public and large private financial institutions is especially important.
Until the 2001 reforms, Japan’s postal savings and pension funds deposited the majority of their assets with the Ministry of Finance’s Fund Management Department, which allocated them for public infrastructure investment (a program known as “Fiscal Investment and Loan Program”). Since 2001, Fiscal Investment and Lending has been significantly scaled back, and postal savings and pension funds have been required to manage their own assets and generate profits. They have allocated a large portion of those assets to the purchase of U.S. Treasury bonds, as these bonds can absorb large amounts of capital and offer relatively high yields.
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As of March 2026, Japan Post Bank held approximately ¥88.2 trillion (about 550 billion US dollars) in “foreign securities and related assets.” At the same date, the pension fund GPIF held approximately ¥73.4 trillion (about 460 US dollars) in foreign bonds. As regards the US Treasury securities only the GPIF held approximately $230 billion—as of March 31, 2026. That was equivalent to approximately one-eighth of GPIF’s total assets.
The Post Bank and GPIF would not dispose of all these securities at once. They are long-term investors that adjust their holdings in accordance with changes in the market. Nevertheless, its sheer weight in the market is undeniable.
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