Japan Market on the Move: JGB Sell-Off, Political Shifts, and Trade Tailwinds, Unwind of Carry Trade?
A confluence of political, fiscal, and monetary developments is reshaping the landscape of Japanese markets. Most notably, the recent sell-off in Japanese government bonds (JGB) has drawn investor attention. Much of the pressure stems from heightened concerns around the July 21 Upper House election, where the ruling party lost its majority, an outcome that raised the prospect of looser fiscal policies, potential tax cuts, and a heavier sovereign debt load. These dynamics have fueled upward pressure on yields.
On the trade front, a notable development emerged on July 22, when the U.S. and Japan reached a tariff agreement setting duties at 15%, well below the previously expected 25%. The more moderate outcome may provide BOJ with additional room to tighten policy. Shortly after the trade deal, BOJ Deputy Governor Shinichi Uchida conveyed a more optimistic tone, stating, “Given the receding uncertainty, by definition it can be said that the likelihood of Japan durably achieving 2% inflation has heightened.” His comments reinforce the view that conditions for resuming rate hikes may soon fall into place. Markets are now pricing in at least one hike by the end of 2025. With stronger economic data, the prospect of large-scale fiscal spending, and waning external headwinds from tariffs, the BOJ is expected to maintain a more hawkish tone in the near term.
Upward pressure along the JGB yield curve has already narrowed the spread between U.S. and Japanese 10-year Treasury yields by 55 basis points since July 2024, when the BOJ initiated its tapering cycle. If this trajectory holds, it could accelerate the unwind of long-standing carry trades. This could put additional upside pressure on U.S. Treasury yields.
Treasury-Backed Stablecoins
On July 18, President Trump signed the GENIUS Act into law, establishing the first comprehensive federal framework for regulating U.S. dollar-pegged stablecoins. The legislation requires stablecoins to be fully backed by liquid assets, with short-term U.S. Treasuries (T-bills) expected to make up a significant share of reserves. This regulatory clarity is likely to drive substantial near-term demand for T-bills and further extend the cap to the short-term borrowing rate, SOFR.
At a time when de-dollarization narratives have gained momentum over the past decade and investor interest in crypto assets has grown, the GENIUS Act may serve to reinforce the central role of the U.S. dollar and the Treasury market in global finance. If you can’t beat them, join them, and better yet, bring them onto your team. By embracing the infrastructure of stablecoins under a regulatory framework anchored in U.S. sovereign assets, the U.S. is not only adapting to digital innovation but also reasserting its influence within it.
