**The 30-year backstory**
Japan's economy melted down in 1990 with the popping of a huge real estate and equity bubble.
To restore the economy, Japan pioneered the playbook central banks now run everywhere: slash interest rates to zero, then buy massive quantities of your own government bonds. This creates artificial demand that pushes yields (aka borrowing costs) even lower.
It's a bit like your left pocket owing money to your right pocket. And being able to print money to pay it back.
It let Japan run up the largest debt in the world. 1.3 quadrillion yen to be exact. That's quadrillion with a Q.
It also opened up an obvious trade. If you can borrow money for free, and put it in something yielding 4, 5, 6%... you've found an infinite money glitch.
Japanese investors plowed into US treasury bills. This made them the largest holder of US treasuries, with $1.2 trillion. The rest went into tech stocks and anything else going up.
This worked great for thirty years until COVID.
Governments were forced to print money en masse, and inflation finally arrived.
Japan's playbook worked when inflation was dead. But when it finally came back and prices started rising, printing money would make it worse. So Japan has had to stop printing money, and raise rates.
**The $1.2 trillion dollar question**
So the reason people are freaking out about Japanese bond yields being up?
Because Japanese bond yields have crossed 4% for the first time in decades. For thirty years, Japanese investors had to look abroad for yield. Now they can get it at home.
That $1.2 trillion in US Treasuries starts to have a reason to head back to Tokyo.
All that cheap Japanese money had to go somewhere. For thirty years, it went into Treasuries, tech stocks, everything. Now imagine it leaving.
And that has markets on edge.
**What's next?**
I don't know how this shakes out. But when Ray Dalio talks about a "changing world order," this is probably part of it.
One of the global market's laws of nature, endless cheap Japanese money, is coming to an end.
**Note:** I wrote this as an exercise to help myself understand the situation. By no means an expert, so let me know if I missed anything obvious.