Trump's Japan Deal Just Sparked A 2008-Style Bond Market Earthquake - SPDR S&P 500 (ARCA:SPY)

Japan's 10-year bond yields surged to 1.59% on Wednesday—levels not seen since 2008—as markets reeled from a new U.S. trade deal and political turmoil surrounding Prime Minister Shigeru Ishiba.

Chart: Japan’s 10-Year Bond Yields Hit Highest Levels Since July 2008

What Sparked The Panic?

The catalyst was a combination of events. President Donald Trump reset tariffs on Japanese exports. The baseline tariff on goods from Japan will now be 15%, while tariffs on autos fall from 25% to 15%.

In exchange, Japan has committed to investing $550 billion in the U.S. and opening its markets to key American exports, including agricultural and industrial goods.

While equity markets initially cheered the news — Japan’s Nikkei index rallied 3.5% — a bond auction told a very different story.

Demand for a 40-year Japanese government bond offering was the weakest since 2011, triggering a selloff across the country's yield curve.

Speculation was already swirling that Ishiba, facing growing pressure from within his coalition, could resign after his party lost its majority in Japan's upper house over the weekend.

Although the Prime Minister denied the rumors, the bond market wasn't buying the narrative of stability.

Oxford Economics: Trade Deal Unlikely To Rescue Ishiba

In a note issued Wednesday, Oxford Economics analyst Norihiro Yamaguchi cast doubt on the deal's long-term impact.

"We estimate that the US’s effective tariff rate on Japanese products is around 17%, in line with our baseline assumption," they wrote, noting that the auto tariff reduction is a positive step but likely insufficient to offset broader pressures on Japan's economy.

"The trade deal has been received positively in Japan, but it’s unlikely to be enough to help Ishiba survive rising pressure to resign," the analysts said.

While the $550 billion investment pledge appears central to the agreement, Oxford noted that details remain vague and "this is unlikely to have a significant impact in the short run."

Why Rising Japan’s Yields Matter Globally

Here's why this matters far beyond Japan. Japan remains the most indebted developed nation on Earth, with a staggering debt-to-GDP ratio of 235% as of March 2025.

While much of this debt sits on the balance sheet of the Bank of Japan, even modest increases in yields can wreak havoc on risk assets globally.

The reason? Carry trades—strategies where investors borrow in low-yielding currencies (like the yen) to invest in higher-yielding assets elsewhere—start to unravel when yields in Japan rise unexpectedly.

That's what happened during the summer of 2024.

Between July 10 and August 5, 2024, Japanese 10-year yields surged past the critical 1% level. The move triggered a powerful yen rally, climbing more than 10% against the dollar in under four weeks. That shift marked the end of Japan's zero-rate era and caught global markets off guard.

As yen-funded trades were rapidly unwound, a cascading selloff followed across global equities. The S&P 500 – as tracked by the SPDR S&P 500 ETF Trust SPY – plunged 9% in just two weeks.

Now, with Japan's 10-year yields pushing toward 1.60%, the fear is déjà vu.