Japan carries the heaviest public debt burden of any advanced economy—over 250% of GDP—yet for three decades, Tokyo borrowed at negligible cost. That era is ending. Benchmark Japanese government bond yields have climbed to 3%, a level the finance ministry never budgeted for, and the ripple effects are being felt across global markets.
The move coincides with a parallel surge in US Treasury yields, where the 30-year bond recently touched two-decade highs near 5.3%. Both markets are being driven by persistent inflation, fiscal expansion, and central banks that appear behind the curve. Oil prices above $95 a barrel, amid the ongoing conflict involving Iran, add further upward pressure on yields.
The entanglement of US and Japanese debt dynamics has taken on a geopolitical dimension. This week, as Group of 20 finance officials gathered in North Carolina, US Treasury Secretary Scott Bessent escalated his campaign to push the Bank of Japan toward tighter policy. Bessent publicly urged BOJ Governor Kazuo Ueda to “do the right thing” to halt the yen’s slide to 40-year lows.
Bessent’s pressure follows a rare coordinated intervention in August, when Washington and Tokyo acted together to stabilize the yen—the first such move since 1998. The operation was partly driven by fears that Prime Minister Sanae Takaichi’s government might sell US Treasuries to fund its own intervention. Japan holds over $1.1 trillion in US government debt, more than any other foreign holder, so Washington chose to sell euros rather than dollars to buy yen, avoiding a direct clash.
Bessent has also experimented with a Japan-style tactic: large-scale bond buybacks aimed at capping long-term yields. The Treasury has announced purchases of at least $4 billion per operation, but markets have not cooperated. The yen has slipped back toward 160 per dollar, and long-term US yields are climbing again. As market commentator The Kobeissi Letter observed, “The bond market appears to be completely ignoring the US Treasury.”
A fiscal reckoning on both sides of the Pacific
The stakes are personal for Bessent, a former hedge fund manager who worked for George Soros in the early 1990s, when Soros’s short position famously “broke the Bank of England.” The same team was later blamed for currency crashes in Hong Kong and Malaysia during the Asian financial crisis. Bessent’s market instincts are being tested in real time, and his fiscal stewardship is under scrutiny.
Under Bessent’s watch, US debt-to-GDP has reached 125%—a level that exceeds the 106% peak during World War II, as economist James Lindsay of the Council on Foreign Relations points out. The Congressional Budget Office projects a federal deficit of $2.1 trillion this fiscal year, about 6% of GDP. Lindsay notes this is happening “at a time of near-full employment when the government balance sheet should be improving, not deteriorating.”
The Biden administration contributed to the spending surge, but Bessent’s tenure has seen interest payments on the national debt exceed $1 trillion in a single fiscal year—comparable to annual defense spending. The Peterson Foundation projects interest costs will more than double over the next decade, and some analysts believe even that estimate is optimistic.
Rather than tackle the underlying debt problem, Bessent has leaned on gimmicks like bond buybacks. His former mentor, investor Stanley Druckenmiller, criticized the approach, arguing that “a credible fiscal package would do more for the long end of the curve than a buyback program a thousand times this size.” No such package appears forthcoming from the Trump White House.
The surge in long-term yields is a global phenomenon. “The confrontation between bond markets and policymakers is becoming a battle of attrition,” says Geoffrey Yu, a strategist at BNY. “Persistent inflation, fiscal concerns and energy risk continue to push investors to demand greater compensation.”
But the dollar remains the epicenter. The real risk is that central banks that effectively serve as Washington’s bankers—including the Bank of Japan and the People’s Bank of China, which holds $633 billion in US Treasuries—lose confidence in Bessent’s approach.
Thirty-year Treasury yields have now stayed above 5% for 55 consecutive days, the longest stretch in two decades. In mid-August, the Treasury sold 30-year bonds at the highest rate in 25 years, a clear sign that investors are demanding more compensation to finance Washington’s deficit. Bank of America strategist Meghan Swiber notes that Treasury investors “remain reluctant to add duration,” and Michael Stanczyk of Allspring Global Investments agrees that long-term yields could keep climbing “as investors continue demanding greater compensation for inflation and fiscal risks.”
The trend line is what should worry investors most. As Japan’s own bond market stress signals deeper global fiscal strains, the two largest debtors in the world are hurtling toward a reckoning that could reshape the global financial order. For more on how Japan’s fiscal situation is evolving, see our analysis of Japan's bond market stress. And for a deeper look at Bessent's buyback strategy, read how it echoes Japan's debt trap.
