Japan is taking a bold step that few expected. The Bank of Japan has raised interest rates again, pushing government bond yields to levels the modern financial system has rarely faced. This move is more than a local adjustment—it’s effectively a stress test for global markets. For decades, Japan relied on near-zero rates to keep its economy afloat, but that safety net is now gone. $SPACE

The scale of the challenge is enormous. Japan’s national debt is around $10 trillion and continues to grow. Rising yields sharply increase debt servicing costs, devour government revenue, and severely limit fiscal flexibility. Few economies can absorb such shocks without facing defaults, debt restructuring, or inflationary pressures. $SENT

Japan’s influence isn’t contained within its borders. The country holds trillions in foreign assets, including over $1 trillion in U.S. Treasuries and hundreds of billions in global stocks and bonds. These investments were profitable when Japanese rates were near zero, but with yields finally rising at home, repatriating capital could create significant liquidity strain worldwide.

A major risk comes from the yen carry trade. Japanese investors have borrowed cheaply in yen to fund investments in stocks, crypto, and emerging markets. As rates climb and the yen strengthens, these trades unwind, triggering forced selling, margin calls, and rising correlations across asset classes—causing markets to move together sharply downward. $MMT

Finally, the consequences ripple to the U.S. and beyond. Higher Japanese rates reduce incentives to finance U.S. deficits, pushing American borrowing costs up. Meanwhile, inflation in Japan limits further currency printing without causing domestic problems. Each policy step now carries global repercussions, making the next few weeks a critical period for markets everywhere.