Japan Just Lit The Fuse On U.S. Bonds – Terrifying Treasury Dump To Be Forced On Washington

So Japan has a big problem. In fact, they have a ton of problems that are forcing them to pull the trigger. The trade war is crushing Japan's economy. Now US consumers are going broke and Japanese goods are getting too expensive. Competing with China in Asian markets is also not possible. The terrorists, even today, are still hammering down Japanese exports. Japan's exports to the US have fallen by 3% in October. This is the 7th month of straight contraction of sales to the US. In fact, their supply has fallen by 33% because Japan is buying US airplanes. So now Japan is earning fewer dollars from the US and this exposes them to a currency crisis through the reserve currency suddenly strengthened. Not a good position to be in. Now how about services in Japan? Because of the tensions with China, Beijing has started to retaliate. Now Japanese tourism is getting hammered, which just adds more to the risk of recession. GDP has already turned negative in Q3 and this quarter looks absolutely horrible. Chinese visitors makes up the bulk of tourists visiting Japan. If we throw in Hong Kong, Japan saw over 10 million arrivals in October. That's four times the amount of visitors from the US. And thanks to Takechi's comments, China has ordered their airlines to cut the amount of flights to Japan till March next year. Flights for December are already 20% down. 12 routes from Chinese cities including Shanghai have been axed. 8% of Japan's entire GDP, which is tourism, is under threat. So goods to the US, their biggest export partner, are collapsing. China is imploding Japan's service sector. As a country, the only escape left would be to rely on domestic consumption. But this is where reality bites once again. Prices in Japan are still increasing. In fact, it is on par with inflation in the United States. People are getting squeezed. You can't count on domestic consumption to save the day. Japan's inflation is still way above the BOJ's target of 2%. Consumer prices are still up by 3%. The cost of everything from insurance to goods is still rising. Wages in Japan are not keeping pace with inflation. Salary growth is less than 2%. In other words, people's purchasing power is dropping in real terms. And if we strip away energy, core inflation in Japan has risen to 3.1%. Amid all the external chaos, Japan is suffering from a cost-of-living crisis. The country is no longer competitive and they know it. To fight inflation, you would raise interest rates. That is the traditional way. But Japan simply can't do it today. The debt bubble is over 230%. This move would push their debt payments off a cliff. Now yes, the Bank of Japan is trapped, caught between a rock and a hard place. They need to hike rates to curb inflation but they simply can't without big consequences. There is the debt situation to consider. The BOJ is already purchasing an insane amount of Japanese government bonds. They are still doing yield curve control, also known as money printing. The bank is buying around 3 trillion yen worth of bonds every single month. That's around 20 billion dollars of money created from thin air. Money used to artificially increase demand for JGBs. And look carefully at where the majority of buying is centred in. The majority of buying is in the 1 to 10 year bonds, especially towards the longer end. The BOJ is worried about higher rates tanking the entire economy. It's just like Besson issuing short-term bonds only to prevent long-term rates from rising. Except Japan is just flat-out printing money using the central bank. This is not good because it's a short-term band-aid. Yes, you will suppress yields in the short term but what happens when you flood the economy with printed money? You increase the supply of currency and you drive its value down. Guys, this is basic math and the market can smell the desperation a mile away. And let these two charts really clear the air. The yen is a reserve currency just behind the dollar and the euro. And when Japanese bond yields rise, normally this would attract buyers of the bonds. This should be happening as the dollar collapses but we aren't seeing it today. Instead of buying the yen to purchase JGBs, investors they're doing the exact opposite. They are shunning Japan's currency because they don't believe a recovery is happening. They are betting that Japan's economy will continue to get smashed down and demand for the currency won't be there. Over the last six months, the yen has crashed by almost 8% against the dollar. And when your currency is crashing against the dollar, you know you're screwed up big time. Now your imports are more expensive. Everything from your steel to LNG costs more to buy from global markets. And why don't investors want the yen? Because Takahashi's stimulus is coming soon. The amount isn't trivial considering the size of Japan's economy. Tokyo has approved an incredible 21 trillion yen stimulus which is equivalent to over 130 billion dollars. Ironically, the money will be spent to combat inflation. This is a huge amount of money that equals 3.5% of the country's entire GDP. And nearly 12 trillion of the amount is money that the government simply doesn't have. I think we know how this story ends. Despite the threat of blowing up the national debt, Japan is simply out of options. They need to flood the economy with money to put a band-aid on inflation. The rest of the big powers are spending heavily on industry. China, for one, won't stop their subsidies while the US is taxing their own consumers to do the same. If Tokyo doesn't inflate and stimulate, they will be left behind. So this is a last-ditch effort to save their critical sectors like the auto industry and semiconductors. Japan is moving to issue over 73.5 billion dollars in new bonds to fund the stimulus. But can Tokyo find enough investors to take the bait? By borrowing the money, the debt pile is only going to grow bigger. Will private investors step in and loan Japan the money when the yen is falling hard? Or will the BOJ have to step in again and conjure new money to keep the music playing? So Japan is caught in a trap. By issuing new bonds, they could make the inflation problem worse and push the debt closer to default. But if they don't, then the consumer will collapse long-term and so will their industries. This is voodoo economics, financial engineering. It's economic sorcery and it points to yields flying up in Japan. Now Japan's 30-year bond yield has jumped above 3.3% for the first time in history. The ultra-long bond is being dumped and avoided. The 10-year yield is also above 1.8%. The highest since the 08 housing collapse. No one is picking up any volumes because Japan's stimulus points to one deadly risk. You will ultimately lose money, high chance of it. Inflation in Japan could continue to rise above 3%. At the same time, the yen could continue to fall against the dollar. The underlying asset of the JGB itself, the currency could get smashed. We are witnessing a big confidence collapse. Japan is at a stage where debt and deficits have left them with no breathing room. Trump's tariff war just exposed this weakness for the world to see. Confidence in JGBs is crashing. Major holders are now big net sellers after many years of being strong buyers. And this realisation means Japan will be left with one option left to prop up their economy. They will have to dump and sell off their huge stockpiles of US treasury bonds. It's perhaps the only option left that doesn't implode their bond market, their currency and by extension, the entire Japanese economy. Here's the irony. Even Scott Besson knew this is a clear and present danger. It will rock the US economy, especially when US borrowing is also edging towards the cliff. Now when Besson visited Japan, he gave a subtle warning to Japan's finance minister. It looks like encouragement that Japan's future is bright but really weep between the lines here. Besson essentially told Japan to stop being ultra loose and to start normalising. The old Abenomics playbook of printing money has to stop. The BOJ has to start hiking rates. Besson wants a stronger Yen as well. The agenda isn't very complex here. A stronger Yen will make Japan's exports more expensive and it will weaken the dollar and that aligns with Trump's plan of a weaker reserve currency. And that's why he's calling on the Fed to cut US interest rates. Japan hiking Dias will help US exports be more competitive. But Japan isn't listening because they simply have no choice. This means a major unwinding of US treasury bonds might be coming real soon. If Japan can't get enough buyers for their bonds, where else are they going to find the liquidity? Sure, you can get the BOJ to print money but that level of witchcraft will most definitely send the Yen on a one-way trip all the way down to Hades. Selling US bonds is ironically the safer option. Now Japan is sitting on the treasure trove of US bonds. While the rest of BRICs are dumping, Japan is still buying up loads of treasuries. That's despite the current trade war and the falling value of US debt. From January till September, Japan has added an incredible $110 billion worth of bonds. They are now sitting on an enormous $1.2 trillion stockpile. Japan can always unwind their holdings to pay down the debt if things get nasty enough. At the very least, it could be used to fund their $130 billion stimulus package. And should Tokyo do that, Besson will be in a world of trouble. The US economy is already undergoing a massive debt binge. Besson is already issuing a ton of treasuries on the short end of the curve and this reeks of pure desperation. Cutie told the world that US bonds are performing amazingly well and if this narrative breaks, if Japan pivots and sells, we could see a breakdown of the treasury market. Again, when I was here in April, the sky was falling with the tariffs that everyone is leaving the US. Since then, the US bond market has been the best performing bond market in the developed world and from Barclays Bank to Goldman Sachs to others are saying it is the tariff income and the fiscal improvement that we are seeing and that's what President Trump is talking about. Now, our best friend has done a show hand on the poker table. He's trying to bluff the world with a lousy hand. He has a 3 pair and the rest of the cards are 5, 7 and 9. And should Japan call his bluff, yields in the US could revolt and just shoot higher and that will destabilize the entire economy. Not even a fat card can save Besson's bond market at that point. Remember when he and Trump said the US will get deficit in autumn? Now, I hope you didn't believe that BS We are in a new fiscal year and with that brings a new fiscal shock. The Treasury posted an insane deficit of $284.4 billion in October. This is the worst opening month in history. Despite record tariff income, government spending has increased by 18% year on year to nearly $689 billion. The bond market is in no condition to absorb any new crisis, least of all from Japan. Besson can't stop issuing bonds if Tokyo starts dumping their holdings. This is going to put big pressure on US bond demand. The supply gets even more overwhelming. Plus, there's also another problem. The duration of the bonds also play a major part. We don't know Japan's exact mix but we can take a good guess here. Bond governments including Japan as a whole, they love longer term US bonds. In 2023, the average duration is around 8.2 years or so. Which means if a dump happens, longer term debt like the US 10-year is likely on the line. And we know what controls rates in the real economy. It's the 10-year yield. That could spike in a worst case scenario. So will Japan dump? That's the trillion dollar question. As it stands, they're trapped on the Titanic. Should things get nasty enough? Selling their stash of US bonds might be the only card left. They might just launch, jettison the lifeboats. But let me know what you think. Will Japan really sell US bonds to save the economy? And will their stimulus even work? Let me know in the comments below. Stay safe. Be sure to smash the like button and subscribe as we navigate through these crazy times.