The Economic Vibes Are Shifting

This is not another interminable chapter in the endless Vibecession debate I frankly, never want to write about again, so America’s most online self-appointed economics expert and the army of weirdos in his mentions can go find another comment section to annoy. This is a blog about Japan and bonds and currency and other boring market indicators that all are pointing in one very bad, not good direction. Although that last part may get the doomers’ attention, the nature of this stuff is it’s easy to diagnose problems, but forecasting when they will actually become A Problem is why millions of people spend trillions trying to find an edge in finance. Actually predicting the future is very hard, but it doesn’t take an economics degree to scan the world of financial headlines and see an array of very large rainclouds on the horizon.

“Government borrowing costs hit multi-decade highs” reads one Financial Times headline from this week. “China investment slump deepens as economy shows signs of weakness,” declares another. Perhaps most immediately worthy of concern is how “Japan’s 10-year bond yield hits three-decade high.” A Bloomberg headline from last week feels like it could fit in the opening scene of The Big Short 2: “Costliest US Bond Sale Since 2001 Is Investor Warning to [Treasury Secretary Scott] Bessent.”

The 30-year Treasury Bond yield is at its highest level since 2007, a fun year that we all know portended great economic news just around the corner. Investors simply are demanding higher interest rates to justify lending to Europe, the United States and Japan, economies whose debt-to-GDP ratios eclipse 100% (and in Japan’s case, well over 200%). We, unfortunately, do have to become deficit scolds to some degree. If you are looking for the likeliest candidate to become A Problem, Japan is it right now. Earlier this year I wrote about how new Japanese Prime Minister Sanae Takaichi and Trump were forcing markets to price in politics, and now the yen is in somewhat of a freefall as Trump’s war with Iran exacerbates all of its problems.

For the first time since 1998, the United States acted with policymakers in Tokyo to backstop the yen at 40-year-lows. To buy yen, the New York Fed sold euros, not dollars, which is not exactly a ringing endorsement of the NY Fed’s belief in the antifragility of the U.S. Treasury market right now. A day’s worth of the impact of the intervention has already been erased, and the Bank of Japan’s (BOJ) $59 billion infusion of cash does not look like it has satiated currency markets’ concerns. Takaichi’s conservative government has yet to tell the bond market how it will pay for its suspension of a multi-billion-dollar food tax while she increases government spending, and traders are getting out in front of what they see as inevitable BOJ interest rate hikes as Japan’s mountain of debt forces many bills they have put off for years to come due. 

Japan has a structural problem that only seems to be getting worse. For years it was able to exist at the bleeding edge of currency and interest rate manipulation thanks the trade surpluses it ran on the back of all those manufacturing exports that terrified people like Donald Trump in the 1980s, serving up a free financial lunch to all its allies in the West. Ever since 2022, Japan has experienced trade deficits because they import so much fossil fuel, roughly 70% of their energy mix (I wonder if anything recently happened to make that more difficult!). Because oil is purchased in dollars, this creates a negative feedback loop with a weakening yen being sold for dollars to buy energy that becomes more expensive for Japan the more the yen weakens.

The VIX is what I have termed the “shit hitting the fan” indicator in these blogs before, and I joked in 2024 how its three largest spikes in history are infamous dates from months like September 2008, March 2020, and uh, August 2024 on the unwinding of the Japan carry trade. The latter was a larger spike than the one Trump gave markets through his harebrained liberation day the following year. The chart is telling us it was a big deal even though it didn’t feel like one at the time outside Japanese markets where the Nikkei had its worst day since 1987.

While it did not describe markets being shocked like the other two larger spikes, this 2024 VIX spike came as a result of a big move in the yen which rose hard against the dollar. The easiest way to explain how this spiked so hard on the unwinding of the Japan carry trade is it was finance’s last free lunch saying goodbye as traders were forced to cut their losses en masse. The BOJ pushing rates towards zero for years meant investors could borrow in yen for free, convert to dollars easily thanks to the low(?) volatility between the dollar and the yen, and then go berserk buying U.S. tech stocks and other assorted assets with free money. Pay down your principal at 0% interest later on with your profits, and voilà, free lunch. Neat trick, right?

Well that’s gone now, and I think that what led to that August 2024 spike in the VIX may be reverberating in the USDJPY chart currently reaching highs it hasn’t hit since boogeyman Japan was a twinkle in Trump’s autocratic eye. A whole generation was raised under the concept that you could take out debt and not really have to worry about interest payments, but since June 2023, the Japanese 1 year government bond yield has gone from negative, yes, negative 0.16% to 1.446% as I write this. ZIRP is dead and only a severe recession will bring it back.

This is a crypto chart

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— Jacob Weindling (@jakeweindling.bsky.social) August 18, 2026 at 11:47 AM

Theoretically, bond yields looking like they are trying to punch the sky and fight God should strengthen the yen. It should bring investment back into Japan at more attractive prices where you can lend the government yen and get repaid one year later, plus 1.4% interest. Japan has had a big problem with domestic investment centered around the Japan carry trade and the fact that no schmuck wants to pay the Japanese government to lend it money when you can just buy literally any other government’s debt at a higher rate, or just go buy Apple stock and watch line make boing. That the line above keeps going up in the wrong direction tells you that it has not yet reached an attractive price for investors to buy short-term Japanese government debt in bulk. Some money is coming home, but the chart itself is becoming a problem as it’s hard to say that Japanese bond yields don’t look like something experiencing an existential crisis of price discovery. Higher yields cut both ways in that the increased return you get paid for loaning a government money serve as a heightened warning that they may not be able to pay you back.

The best marker that the economic vibes have shifted in a tangible way is the ongoing bond rout that is getting worse. This is the largest market in the world that funds tens of trillions in government operations, and investors are selling it as they balk at buying long-term debt. Central banks are typically the largest purchasers of this long-term government debt, but now they don’t know if they can trust the United States government as much as they can trust gold over the next 30 years, and all these changing dynamics rooted in a rising level of distrust around trillions of dollars is warping debt markets into a contorted figure that simply does not look sustainable.

And when things go boom, debt markets are usually the starting gun. What sparked the March 2020 crash was a tepid Treasury auction destroying any remaining illusion that things were under control. On September 17th, 2008, a $62 billion money-market fund announced that its net asset value was actually $0.97 after writing off $785 million in Lehman Brothers commercial paper. This triggered a bank run, as money markets saw $172 billion in redemptions until the government announced a backstop three days later, and it’s not like things got much better the next month.

Equity markets are equipped to handle surprises to the downside far better than the debt markets are, in large part because the debt markets are supposed to comprise the risk-off portion of one’s portfolio. They’re your cash generating interest on a schedule that fits your life, where you’re betting that the BOJ or the European Central Bank or the Fed will still exist and be solvent in a certain number of years. Things go boom when every part of your portfolio becomes risk-on, and there’s a very good reason why so many of our economic and financial policies are centered around mitigating bank runs. Silicon Valley Bank might still be alive today if Bill Ackman’s group chat hadn’t convinced each other that was the start of World War Z.

So while the always excellent and must-read FT Alphaville laments that we should “Forget the bond rout, fund managers are in party mode,” that doesn’t mean the vibes are very festive in a stock market that knows its elevated valuations are running on some unknown amount of borrowed time. The vibes in markets now are more akin to that seminal photo of people playing golf amidst the backdrop of a burning topography, knowing that the fire is coming for us all one day, so we may as well get a round in while we still can. No one knows when the music is going to stop, but the increasingly worrisome problems with Japan and long-term debt markets are forcing everyone to listen intently.