Japan’s stock market, the Nikkei 225, closed down 0.5% but off its low. Earlier the Nikkei was down 2.5% following the Bank of Japan decision to maintain its short-term interest rate at 0.5% while initiating a gradual sell-off of 330 billion yen in ETFs annually. At the same time Japan’s 10Y yield surged to new highs at 1.642%. Why does it matter? The Nikkei’s decline and rising Japanese yields are part of a broader trend drawing parallels to potential U.S. market vulnerabilities if fiscal deficits aren’t addressed. U.S. 10-year Treasury yields, currently around 4.12%, have also been volatile, influenced by the Federal Reserve’s recent 25-basis-point rate cut and expectations of further easing.
Japan is a major holder of U.S. Treasuries (over $1.1 trillion as of mid-2025), and a shift in Japanese investment strategy due to rising domestic yields could lead to reduced U.S. bond purchases, pushing U.S. yields higher. Additionally, U.S.-Japan trade dynamics, with Japanese exports to the U.S. down 13.8% in August due to tariffs, add pressure. If Japan reduces its U.S. Treasury holdings to manage its own yield curve, U.S. 10-year yields could rise further, potentially exceeding 4.1% in the near term. Higher yields increase borrowing costs for U.S. corporations, which could compress profit margins, especially for growth stocks (e.g., tech sector, heavily weighted in the S&P 500). For example the 2008 yield spike in Japan preceded a U.S. stock market correction. A similar dynamic today could see the S&P 500 face downward pressure if yields hit 4.2%–4.3%.