Japanese stocks just recorded the biggest weekly outflow in history, as $11.8 billion was yanked out between last Wednesday and this week, according to data reported by Bank of America.
The sell-off came as yields on long-dated government bonds exploded to all-time highs, driven by investor fears about Japan’s ballooning fiscal deficit.
The cash exit from Japan didn’t happen in isolation. Globally, equity markets lost $9.5 billion over the same period — the highest for the year. US stocks lost $5.1 billion, while European equities brought in $1 billion, a rare contrast as Japan dealt with the most intense capital flight it’s ever seen.
Source: TradingView Bond demand crashes as yields surge
Yields on 40-year Japanese government bonds hit 3.689% on Thursday, which is also a record. They later dropped to 3.318%, still nearly 70 basis points higher than where they were at the start of the year. 30-year yields also jumped over 60 basis points to 2.914%, while 20-year yields rose over 50 basis points.
That came right after demand for a new batch of 40-year debt fell to its weakest level since July 2023, based on calculations by Reuters. The collapse in demand followed a critical change in market structure.
Japanese life insurance companies, usually reliable buyers of long-term bonds, have already fulfilled their regulatory quotas, according to Rong Ren Goh, a portfolio manager on the fixed income team at Eastspring Investments.
With them out of the picture and the Bank of Japan scaling back its bond purchases, yields have nowhere to go but up. This spike in yields has massive implications outside Japan. Investors are now worried about a possible return of funds to Japan from the United States, especially if Japanese bond yields start to look more attractive than US returns.
Albert Edwards, global strategist at Societe Generale, said this could trigger what he called a “global financial market Armageddon.” He pointed out that if Japanese investors move their money home, the first to get hit will be US tech stocks, which have seen huge inflows from Japan over the years.
Michael Gayed, portfolio manager at Tidal Financial Group, warned that the situation is more dangerous than people think. “Japan looks like a ticking time bomb. If confidence in one of the financial market’s traditionally safe assets has cratered, confidence in the global market could go with it,” Michael said.
Carry trades start to unwind as yen rises
The surge in bond yields is also threatening to unwind the yen carry trade, a strategy where investors borrow in yen, which normally has low interest rates, and invest the money in higher-yielding foreign assets. That setup only works when the yen stays weak.
But now, with yields surging and capital starting to return home, the yen has strengthened more than 8% since the beginning of 2025.
That previous carry trade unwind happened when the Bank of Japan raised rates in August 2024, leading to a sharp yen rally and a big sell-off in global markets. Now the setup is even worse. Alicia García-Herrero, chief economist for Asia Pacific at Natixis, warned that “the carry trade unwinding that is about to ensue will be worse than that in August 2024.”
Alicia said the stronger yen, pushed higher by capital returning and investors dumping dollars, can’t be sustained for long. But for now, it’s gaining steam, and it’s dragging global markets into deeper volatility.
The stakes are high because Japan holds ¥533.05 trillion ($3.7 trillion) in net external assets, the second-largest in the world. When that kind of capital starts moving back home, it throws off global liquidity and raises borrowing costs across the board.
David Roche, strategist at Quantum Strategy, said that tightening liquidity could push global growth down to 1% and stretch the bear market even further. He also said this is the end of the idea that the US is the default winner in global investing, a sentiment now spreading in Europe and China.
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