This is a stock guy’s perspective, and although I’ve been heavily involved in Asian stock markets in general, and Japan’s in particular, I’m not a fixed income expert.

Having written that, my understanding is this:

the simplest case

–the Japanese 10-year government bond yields 2.8%. The comparable US Treasury yields 4.6%. That’s a 160 basis point yearly difference. Why not, then, sell Treasuries, use the money to buy JGBs and enjoy the yield pickup? If we had all done this in early 2023, however, the spread would have been between 3.4% on Treasuries and less than 0.5% for JGBs.

In addition, the dollar value of the yen has fallen from about 115 to the dollar to almost 160–something like a 30% slide. Anyone who shorted JGBs three years or so ago has picked up 5%+ on the interest rate differential plus almost a third on the yen’s decline.

but why stay simple?

…that is, why not short the JGB and buy, say, stock in Nvidia? If you did that in early 2023, you’d have made 10x your money on the stock selection, while only needing to buy back yen worth 70% of your initial loan.

The US has recently enter the forex market along with the Japanese central bank to try to prop up a sagging yen. Interestingly, the Financial Times has written that the US has not sold dollars to buy yen but has used euros held by the Fed instead. Assuming, as I do, that the FT is correct (after all, it is owned by a powerful Japanese media conglomerate), I think this means that Washington fears that dollar-based entities, like hedge funds or private equity, have done enough of this that triggering an unwind could get ugly pretty quickly. Ugly here means large-scale selling of dollar-denominated instruments like Treasuries or publicly listed domestic equities and buying yen with the proceeds. This, of course, would not be in the same league as starting a war in Iran without doing a routine ammunition check, or ICE killing citizens, or shrinking the workforce through arrests and deportations. But starting a steep stock market decline would still be very visible, as well as another sign that Washington today isn’t chock full of the best and the brightest.