Japanese stocks have just experienced their largest weekly outflow ever, with a staggering $11.8 billion pulled out between last Wednesday and this week, according to Bank of America data. This massive sell-off is shaking both local and global financial markets. here’s what’s driving it and why it matters.
What’s Happening in Japan’s Market?
Record-breaking outflows:
Investors withdrew nearly $12 billion from Japanese equities in just one week, marking the biggest outflow in the country’s history.A surge in government bond yields:
Yields on long-term Japanese government bonds soared to historic highs, sparking fears about Japan’s growing fiscal deficit and investor confidence.Global market context:
While Japan saw intense capital flight, global equity markets lost a total of $9.5 billion in the same period, the largest drop this year.US stocks saw $5.1 billion in outflows
European equities gained about $1 billion, contrasting with Japan’s heavy sell-off
Why Are Japanese Bond Yields Soaring?
40-year bond yields hit record highs:
On Thursday, yields for 40-year Japanese government bonds spiked to 3.689%, before settling at 3.318% — nearly 70 basis points higher than at the start of 2025.30-year yields jumped over 60 basis points to 2.914%
20-year yields rose more than 50 basis points
Falling demand for new debt:
Demand for a fresh issuance of 40-year bonds dropped to its weakest since July 2023, signaling waning investor appetite.Changing market players:
Traditionally, Japanese life insurers are reliable buyers of long-term debt. But with regulatory buying quotas met, they’re stepping back.Meanwhile, the Bank of Japan is reducing its bond purchases.
This leaves fewer buyers in the market, pushing yields higher.
The Ripple Effect: Global Implications
Investor fears:
Rising yields may lure funds back to Japan, especially if bond returns surpass those in the US.This could trigger a massive capital flight from US tech stocks, which have historically attracted Japanese investment.
Market warnings:
Albert Edwards, global strategist at Societe Generale, warns this could spark a “global financial market Armageddon.” Michael Gayed from Tidal Financial calls Japan a “ticking time bomb,” suggesting that a loss of confidence in Japan’s financial assets could drag down global markets.
Yen Strengthens as Carry Trades Unwind
What is the yen carry trade?
Investors borrow cheaply in yen (thanks to low interest rates) and invest in higher-yielding foreign assets.Rising yields threaten this strategy:
With bond yields surging and capital returning to Japan, the yen has strengthened by over 8% since early 2025.This reverses the typical weak-yen environment needed for carrying trades to work.
Potential volatility ahead:
A similar unwind happened in August 2024, causing a sharp yen rally and global market sell-offs.
Alicia García-Herrero, chief economist at Natixis, warns this next unwind “will be worse than that in August 2024.”
Why This Matters Globally
Japan’s massive external assets:
Holding over ¥533 trillion ($3.7 trillion) in net external assets, the second largest worldwide, capital moving back to Japan could disrupt global liquidity.Higher borrowing costs:
Tightening liquidity might push global economic growth down to 1%, extending the current bear market.Shifting global investor sentiment:
According to David Roche from Quantum Strategy, the belief that the US is the automatic global market winner is fading, with similar sentiments emerging in Europe and China.
In Summary:
Japan is facing an unprecedented stock market withdrawal alongside soaring bond yields, signaling investor caution amid fiscal concerns. The repercussions are being felt worldwide, from rising volatility to shifting capital flows and economic uncertainty.
#JapanMarkets #GlobalFinance #BondYields
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📢Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always conduct your research before making investment decisions.