People are saying rising Japanese interest rates are the real risk to U.S. Treasuries and my stocks. Could something like the August crash two years ago happen again?

Japan is the largest foreign customer for U.S. Treasuries

As of July 2026, Japanese investors held $1.1039 trillion of U.S. Treasuries, the largest among foreign holders (11.9% of all foreign holdings). But that holding has fallen by about $135 billion since February (IndraStra, 2026-10). As Japanese rates rise, this big customer has a reason to buy fewer U.S. Treasuries or sell them.

Japanese rates have climbed to levels not seen in 30 years.

• On September 18, the Bank of Japan raised its policy rate to about 1.25% in a 7-2 vote, the highest since June 1995
• The 10-year JGB yield hit 3.097% on October 2, the highest since August 1996, and the 30-year reached 4.166% on October 5, the highest since records began (1999)
• The U.S.-Japan 10-year yield gap halved from 3.98 percentage points in October 2023 to 2.00 percentage points in September 2026 (IndraStra, 2026-10)

Why Japanese investors are leaving U.S. Treasuries

The key is the cost of currency hedging. Japanese institutions hedge to eliminate currency risk, and that cost is roughly the U.S.-Japan short-term rate differential.

• The effective yield on a currency-hedged U.S. 10-year is about 2.57%, below the Japanese 10-year at 3.092%
• This inversion has persisted every month since October 2022, and the gap widens to about 1.2 percentage points for 30-year bonds (IndraStra, 2026-10)

Buying U.S. Treasuries earns less than buying bonds at home. In fact, Japanese residents were net sellers of 2.76 trillion yen of foreign long-term bonds from January to August, the opposite of 11.0 trillion yen of net buying in the same period a year earlier. Banks in particular sold 9.25 trillion yen (IndraStra, 2026-10).

This flow is one reason U.S. long-term yields have not come down despite the jobs shock. The term premium flagged in the report is not just a U.S. fiscal problem but also a supply-demand problem in which "the largest foreign buyer is pulling out."

Could a crash like August 2024 happen again?

In August 2024, the Bank of Japan raised rates to 0.25% on July 31, and when U.S. jobs data disappointed two days later, the yen surged 12.6% between July 11 and August 5. On August 5, TOPIX fell 12%, the VIX topped 60 in off-hours trading, and bitcoin and ether fell as much as 20% (IndraStra, 2026-10).

There are two differences now.

1. Speculative positioning has already been reduced. CFTC non-commercial yen futures positions flipped from a net short of 163,000 contracts on July 28 to a net long of 55,000 contracts on September 29 (IndraStra, 2026-10). There are not many bets against the yen left to be unwound all at once as in 2024
2. The risk is a "slow exit" rather than a "crash." Even with speculative positions cleared, USD/JPY is at 158.25, so the yen remains weak. The money leaving is from real-money institutions such as banks, not hedge funds, and they sell slowly over months

So this time the risk is less a one-day 12% crash than U.S. long-term yields failing to come down and staying high. It is not a one-day shock but pressure that weighs on equity valuations over months.

On August 7, 2024, Bank of Japan Deputy Governor Shinichi Uchida calmed the crash by saying "we will not raise rates when financial and capital markets are unstable."

That remark set a precedent that the Bank of Japan slows down when markets wobble. The low probability of about 25% for a hike at the October 30 meeting reflects this learned behavior.

What should investors do?

• Long-term bond ETFs (TLT, etc.): Long-term yields are unlikely to fall quickly while Japanese demand keeps leaving. Rather than seeking big gains from long bonds, earning yield in short-term bonds with maturities of five years or less is more favorable
• Three indicators to check: The Bank of Japan's October 30 decision, whether the Japanese 10-year breaks above 3.1%, and the trend in Japan's holdings in the monthly U.S. Treasury foreign holdings data (TIC)
• Crash alarm: If USD/JPY plunges below 150 within a few days, a 2024-style unwind could repeat. In that case, cut risk assets where yen carry money had piled in first, such as crypto and Korean and Taiwanese tech
• Equity holders: Persistently high long-term yields weigh most on richly valued growth stocks. It is better to tilt the portfolio toward companies that are already generating profits