Japan Sends A Terrifying Global Warning: U.S. Treasuries Face Major Sell-Off For Survival

0:00 All right, guys. So, let's talk about Japan today. While the US markets might be in trouble, Japan is in emergency mode. It's critical we talk about this because it highlights two big risks that we all inherently know. The bigger your debt gates, the more you compound your financial problems, and there's a limit to how much you can borrow without destroying your economy. Now, Japan's debt to GDP ratio is insane. Is expected to be around 240% and that's 2.4 times its annual economy output. And this savages Japan into a very serious trap. Japan's debt level is more than double that of the US. And because of that, one of the worst things that can happen is for interest rates to rise. Suddenly, your debt repayments become more expensive. And that robs your economy of

0:46 precious revenue to reinvest back. This is horrific, especially when you are fighting a trade war with the United States. Japan's 30-year government bond has officially hit 3.15% yield. This is the highest level in 30 years, is the highest level in history, and is an epic warning sign. When countries decide not to buy your long-term bond, it basically means one of two things. Either they believe real inflation will be a problem and your debt payments won't satisfy their returns, or they believe your entire economy will collapse and eventually push your bond situation into default. and understand how interconnected Japan's markets are with the world, especially the US. The yen is one of the world's reserve currencies. And as the

1:32 world dumps US assets, some money flows into the yen. But bond yields are still spiking. So this isn't really a currency issue, per se. It's an entire economic issue at Trump's trade war is going to make things much worse for Japan. Now, Japan's economy contracted by 0.7% in Q1 this year after adjusting for inflation. Like the US, Tokyo is one leg in the recession coffin. And this print is before Trump started his tariff escalation on the wall. Digging deeper into data, we can tell Japan is about to enter a world of rolling recessions. In 2023, they entered one for three consecutive quarters or 9 months. 2024 was relatively fine. Japan's exports recovered thanks to the collapsing yen.

2:19 But the current quarter's results sets the stage for yet another recession this year. In Q1, private consumption was literally flat, 0% growth. Exports fell by 0.6% while imports grew by 2.9%. Remember that imports counts against a country's GDP. So this rise is not a good thing if your exports and private buying collapses. Business spending rose by 1.4%. 4%. But given the new climate today, this probably won't last. This tells us quite a few things about Japan's economy. Production costs in Japan are rising and their goods are becoming more expensive. Since January, the yen has been rising against the dollar. So, their exports are becoming more and more uncompetitive. At the same

3:05 time, they are facing more competition from Chinese exporters. Furthermore, we can't count on Japan's population to boost domestic growth. Demographics there just don't support local consumption holding up the economy. According to fat calculations, Japan is rapidly aging. By 2045, the biggest consumer class of 15 to 64 will go from 60% to around 52%. Ages 16 and below will drop further down to just above 10%. Meanwhile, the elderly will go from 30% to almost 40. And this presents a very big problem for Japan. This is a society that doesn't have immigration policies like the US or Europe. So there will be no sudden influx of new citizens to save the day. And when a society ages

3:50 without a productive call, more payouts will be needed for social security. They have a national pension and healthare system which is actually quite efficient and effective. But to maintain that needs a lot of money as well. In 2024, Japan's fiscal deficit is projected to increase to 3.6%. 6% of GDP. A big jump from the previous 2.9% the year before. Now it's much less than the US, but still a big problem. Why doesn't Japan spend more to rescue their economy, right? This is a common push back that we get. Well, simply they can't. The debt levels are just too severe. Plus, inflation in Japan is crazy high compared to the G7. Their CPI is around 4% while the US and Europe are both

4:35 below 2.5%. So trying to save the Japanese economy by printing money is also impossible without jacking up inflation. And this is the economic trap we have been talking about. The bigger your debt pile, the fewer options you have left. Japan should be hiking rates, but doing so will compound the debt problem. The Bank of Japan is trying their best to delever. Since 2010, for 13 years, the central bank has been in full yield curve control mode. Basically, they bought a boatload of bonds every single year. But in 2024, especially this year, the BOJ is beginning to sell off their holdings. They are doing a U-turn in the middle of a trade war. This is risky because it reduces demand for Japanese bonds. The biggest buyer is now walking

5:20 away. While it's true that money is flowing to yen, there's an underlying reason why bond yields are still spiking. The economic fundamentals are poor and inflation is still a problem. It's a clear reason why Japan is taking a hardline position against Washington. They simply cannot tolerate the steel and auto tariffs. A 25% import tax will eat up their margins and crash the exports even further. Once again, they saw how China played hard ball and China won. So, the Japanese wants to try their hand at using the Chinese strategy and hopefully it works and it better work because the bond market is unforgiving. The recent bond auction just confirmed everything across the board. Japanese yields flew up. The 10-year rebounded higher, but look at the 20 to 40year

6:07 duration. They have spiked to nearly all-time highs. No one wants to buy the super long bonds anymore because the economy is still weak. Fund managers are expecting the BOG to step in to save the day. And this is where we need to talk about the two biggest risk on hand for the US. Yes, there could be two implosions happening in both the US stock and bond market. And let's go through how the treasury market is now at big risk. Japan needs to find a way to bring down the bond yields when investors they are all in panic mode. Now getting the BOJ the U-turn and print might be very costly. As we said, inflation might rebound and adding more to the national debt might just spike yields even higher. So what other leverage does Japan have? Let's think about it. They have over $1.1 trillion

6:55 worth of US debt and I think you get where we are going with this. Now if Japan dumps their bond holdings, there are several benefits to it. Firstly, the dollar could fall further as the yen rises and this helps to keep a lead on inflation. Japan imports around 90% of their energy. So prices there as well as food will head down and this reduces pressure on bond yields. Furthermore, if Japan proceeds to use the money to buy JGBs, they can push the yield down even more. Basic supply and demand. They'll be swapping US bonds for their own local government debt. Finally, investors will love it at least for a while. It shows that the government or the BOJ is taking steps to defend the bond market. However, there are tradeoffs after all. Japan is in a position where every

7:40 action has a push back. They unlike China by selling treasuries to defend their bond market. They could strengthen the yen too much. They will hurt their exports even more. So this is more or less a nuclear strategy. But there's very little room left to maneuver. But will Scott Besson allow it? Because that move will drive up the dollar, but most definitely spike bond yields higher as well. Across the board, whether it's a 10-year or the 30-year, we are reaching levels that are even higher than the April disaster. This really goes beyond the downgrade. The entire framework of the world economy is unraveling and people are really bearish about the US economy. They will be importing less. Prices will be heading up and many countries including Japan are playing hard ball with the US. Even Trump

8:25 himself has no idea what US trade policy is today and what it will be tomorrow. How inspiring is that for investor confidence taking advantage of us. We never did anything, but now we're doing it to them and and fairly very I'll tell you what, modestly. But we'll be taking and we are taking in right now 25% on cars, 25% on steel and aluminum, uh 25% on other things, and that'll be going up to 50, 75, maybe 100 in some cases. We have to get our pharmaceutical industry back. Once we establish that in another couple of weeks, it'll start roaring back. It's already roaring back because they know we're doing it. and uh it's it's really been uh you've done a great job. But and that's just the risk on the trade front. Fiscal policy is also a

9:12 disaster. The debt ceiling is also about to be raised. Besson has confirmed that the US will not default on the national debt which is code for endless spending. We have big warnings from various outlets. The CBO is warning of 107% debt to GDP by 2029, surpassing the record level in World War II. Meanwhile, Moody cited big deficits as a key reason for the downgrade. The federal deficit is expected to widened to 9% of GDP by 2035. It's almost triple that of Japan. By then, repaying the debt will be even more impossible. That's why the trade deal with Japan is actually extremely important. Saving the Japanese economy is tantamount to saving the US economy as well. And the most direct way to do

9:59 it is to remove the tariffs on Japan, especially the auto tariffs because the higher yields rise in Japan, the closer they will get to desperation mode. And let's have a reminder of how horrific the situation is. The 30-year Japanese bond is trading well above 3%. And this presents a big problem for the yen carry trade as well. Now, the old playbook was to borrow money in yen to par into US bonds, but that entails currency risk and rising bond yields. Well, Japanese investors now have an even better setup in their own domestic bond market. Their 2-year yield is only at 0.7% while the 30-year can give a 3.1% return. So now funds and even retail investors can borrow at low short-term rates and invest in longerdated Japanese bonds.

10:46 It's a very attractive setup because now there's no currency risk as well. Everything is in the Japanese yen. This setup is horrific for US investments. Now, the strategy was to borrow in yen at low rates to buy US stocks and bonds. But if the dollar keeps crashing, what's the point? You could end up in the rate and lose years in potential returns. And if Japan pulls the plug on US treasuries, whether it's the BOJ selling or fund selling is the same thing. It could drive asset prices lower there. The situation in Japan is dead serious. Back in a finance forum, Besson defended the need to have a strong dollar and to him that is in terms of capital flow basically for money to enter the US. To me, the strong dollar means having the

11:32 policies in place to the deserve capital flows and have confidence, but it doesn't mean that the the price on the the Bloomberg screen every day. And it it also has different meanings in in terms of bilateral, right? their prices. But how is capital going to flow into the US behind such a nasty backdrop? It's quite impossible until the trade situation gets resolved. Now, Besson has mentioned that countries will be getting letters from the headmaster. Trump is tailoring ultimatums to countries to take it or live it. But I don't think doing that with Japan is smart. Japan's Kato is going to meet with Besson to talk currencies. And the real intention is to let Japan either maintain a weaker

12:17 yen or at least give Japan the room to slowly appreciate it up. Because if Bess insists on a plaza called 2.0, this could just blow up Japan's export economy and the ripple effects will spread to their bond market and that in turn could spell doom for the US Treasury market as well. Japan might very well dumb their trillion dollar bond holdings, the reserves of US debt to stay afloat. And at this point of time, Besson can't really afford for that to happen. But let me know what you think. Will Japan sell off their US bonds to survive? And will the US keep pressing Japan even now? Let me know in the comments below. Stay safe. Be sure to smash the like button and subscribe as we navigate through this crazy times.