Nomura Expert: US Treasury Market Depends on Japanese Capital as BOJ Normalization Threatens Bond Flows

The Quick Take

• The US bond market depends critically on Japanese capital flows, with Japan representing one of the largest foreign holders of US Treasuries at approximately $1.1 trillion
• Nomura asset manager Sönke Siemßen warns that US monetary policy trajectory poses dangers for global bond markets, particularly given Japan's role as a crucial external financier of US fiscal deficits
• Any shift in Japanese monetary policy that reduces the yen carry trade incentive could trigger Japanese capital repatriation, removing a critical bid from the US Treasury market

According to Japan expert Sönke Siemßen of Nomura Asset Management, the US Treasury market is critically dependent on Japanese capital at a moment when US fiscal dynamics are placing record supply pressure on global bond markets. Japan holds approximately $1.1 trillion in US Treasury securities — the single largest foreign country holding — providing a stable bid that helps the Treasury Department finance the US government deficit at rates lower than they would otherwise clear. The interdependency means that any development that changes the incentive structure for Japanese investors to hold US Treasuries carries systemic implications for global borrowing costs.

The yen carry trade — borrowing cheaply in Japan to invest in higher-yielding US assets — has been a structural support for US bond markets for three decades. However, the Bank of Japan has been slowly normalizing its ultra-loose monetary policy, raising its policy rate and signaling further gradual increases. As Japan's domestic interest rates rise, the carry trade becomes less attractive, and Japanese institutional investors including life insurance companies and pension funds may gradually reduce their US Treasury allocations in favor of higher-yielding domestic Japanese government bonds. A sudden, disorderly unwinding of the carry trade — as partially seen in August 2024 — could send shock waves through US Treasury yields at precisely the moment when the US government is issuing debt at record volumes.

The critical indicators to watch are Bank of Japan rate decisions and any forward guidance on the pace of monetary normalization, and Japanese Ministry of Finance data on US Treasury Holdings in its monthly balance of payments reports. The macro variable is whether the BOJ's normalization is gradual enough for US bond markets to absorb reduced Japanese buying through other demand sources. Any sharp yen appreciation signal — which would accelerate carry trade unwinding — should be treated as a leading indicator for US Treasury yield volatility and potential German Bund contagion through correlated position unwinds.

Synthesized from 2 sources.