Offshore

EndGame Macro
Japan Is Letting Rates Rise for One Reason…To Fight What Comes Next

For most of the 2000s and 2010s, Japan’s bond market was saying we don’t believe in growth, we don’t believe in inflation, and we don’t believe the future will look much different from the past. You can see it in the way the 10 year, 20 year, and 40 year yields sink and then sit near zero for years. That wasn’t just pessimism. It was the Bank of Japan actively trying to stop the country from sliding into a permanent debt deflation loop with weak demand, falling prices, cash hoarding, and even weaker demand.

Then the picture changes. From around 2023 onward, yields rise across the curve, with the long end leading. Today the curve is clearly steeper…roughly 2% on the 10 year, around 3% on the 20 year, and high 3s on the 40 year. In Japan, that’s not noise. It’s a regime shift both in policy and in mindset.

What Japan Has Really Been Fighting

Japan’s deflation problem is about behavior. Businesses didn’t invest because they didn’t expect demand. Workers didn’t get sustained wage growth. Households hoarded cash because tomorrow was expected to be cheaper than today. The price level was the symptom; the belief system was the disease.

So the goal was never simply make prices go up. It was to break the expectation that nothing ever improves.

The Plumbing Behind The Fight

Japan’s strategy has been straightforward, even if extreme…

First, suppress yields and expand the balance sheet. When the BOJ buys bonds, it removes duration from the market and floods the system with liquidity, pushing capital out of safe assets and into risk, lending, and spending.

Second, anchor expectations with tools like Yield Curve Control. Capping the 10 year wasn’t just about rates, it was a signal that financial conditions would not be allowed to tighten enough to restart deflation.

Third, accept currency weakness as a feature, not a bug. A softer yen imports inflation and reminds households that holding cash isn’t risk free.

So Why Are Yields Rising Now?

Because Japan is stuck between two dangers…deflation returning, and the bond market losing all credibility. Holding yields at zero forever distorts the financial system, breaks price discovery, and turns the BOJ into the entire market. At some point, that becomes its own instability.

Letting yields rise carefully is an attempt to normalize without losing control. The fact that the long end is rising faster matters. It shows the market repricing time risk and fiscal risk again, especially with Japan’s massive debt load.

What Happens When The Global Downturn Hits

If a real global slowdown takes hold, Japanese yields fall again. Even from these higher levels.

A downturn pulls capital into safe assets, drags down inflation expectations, and strengthens the yen. And a stronger yen is imported disinflation, exactly what Japan fears most. Exports weaken, prices cool, wages lose momentum, and the old deflationary loop tries to reassert itself.

Why This Chart Is A Warning And A Setup

If that happens, Japan won’t stay normalized. It will pause, then ease through rate cuts, renewed purchases, or some form of volatility control. They may not call it YCC again, but the behavior will rhyme.

The key insight is this…Japan is lifting yields now to rebuild policy room. Zero forever leaves you powerless when the cycle turns. A controlled rise today gives them something to cut tomorrow.

That’s what this chart is really predicting. Japan is trying to escape deflation, but it’s doing so with one eye firmly on the next global downturn because Japan knows better than anyone that deflation never disappears. It just waits.
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