As the end of the month approaches, markets are being shaped by the risk of bond-market contagion coming out of Japan-still contained, but worth watching closely-in an environment where equities remain supported over the medium term and where currencies (the yen and the dollar) are becoming key leading indicators of global stress, all the more so after the status quo maintained by the Bank of Japan last Friday. Rate normalization in Japan is driving a rapid rise in JGB yields, with early signs of spillover to Bunds and US Treasuries. The levels to watch are clearly identified: a 10-year Bund above 3% and a 10-year US yield above 5% would be signals of global stress.

Source: Bloomberg

On the verge of a systemic crisis?

At this stage, there is no immediate systemic crisis, but extra vigilance is required. We advise you to keep an eye on future developments without panicking-at least as long as global yields do not break above their long-term resistance levels.

The impact on equity markets is a technical breather, not a reversal: despite a bout of stress early last week following the US president's announcements. The bias therefore remains bullish over the medium term.

Yen and the rate spread

Source: Bloomberg

In recent years, the trend in the JPY (white) was closely correlated with the spread between the US 10-year yield and the Japanese 10-year yield (blue). Since mid-2025, however, a decoupling has emerged, with the yen continuing to fall even as the rate spread narrows. There are six factors behind this :

  • The market is looking at real rates, not nominal rates
  • The BoJ is seen as "behind the curve"
  • The JPY carry trade is not dead, but it is changing shape
  • The shock in JGBs is translating into capital flight out of Japan, not into a move into the yen
  • Japanese institutions continue to export capital
  • The FX market is focused on "break risk", not convergence

When would the yen really strengthen?

The JPY would reverse sharply if one of these elements were to materialise:

  • Global risk-off (carry unwinds)
  • A credible, rapid rise in Japanese real rates
  • Coordinated intervention by the BoJ/MoF/Fed
  • Global stress forcing the repatriation of Japanese capital

Technically, USD/JPY ultimately stalled at 159.25 and broke the first support at 158.85, marking a bout of yen recovery. Targets sit at 154.60 (currently being tested) ahead of 151.65/35. More broadly, the dollar lost significant ground last week, mirrored by EUR/USD returning to test last summer's highs at 1.1920. A break above that level should trigger a fresh leg lower in the US dollar for several months. A first support to watch is 1.1790.