Japan's Lehman Moment

IV That morning, Prime Minister Sanae Takagi announced the dissolution of parliament and a general election to be held on February 8, alongside a ¥21.3 trillion stimulus package—including a two-year suspension of the food consumption tax. Immediately after the announcement, a 20-year Japanese government bond (JGB) auction suffered catastrophic undersubscription. Traders later described it as “the most chaotic trading day in years.” The yield on 40-year JGBs surged to 4.24% within hours—the first time since the maturity’s introduction in 2007 that it had breached 4%; the 30-year yield jumped 25–30 basis points in a single day, marking its largest daily move since 1999. Most shocking was how little trading volume triggered the chaos: merely $170 million in 30-year bonds and $110 million in 40-year bonds wiped out $41 billion in value across the entire yield curve. A ‘market’ worth $7.3 trillion—where hundreds of billions in value can vanish from just a few hundred million dollars in trades—reveals that genuine liquidity providers have already exited. Contagion spread globally within hours: U.S. 10-year Treasury yields spiked nearly 6 basis points; 30-year yields approached 4.93%, nearing the psychological 5% threshold; European sovereign bonds came under simultaneous pressure. As panic rippled across global markets, U.S. Treasury Secretary Bessent called Japan’s Finance Minister to discuss the situation. Then the crisis was ‘resolved’: Officials rushed to reassure markets; the New York Fed conducted a “foreign exchange check,” querying banks about their USD/JPY positions—a move widely interpreted as signaling imminent U.S.–Japan coordinated intervention. The yen promptly rebounded from above 159 to around 152 against the dollar. At its January 23 meeting, the Bank of Japan held rates steady but signaled possible future hikes. After the February 8 election, Takagi’s LDP won a supermajority of 316 seats, eliminating political uncertainty—and yields retreated from their peaks: the 40-year yield fell to 3.62%, and the 10-year yield returned to roughly 2.1%. Markets breathed a sigh of relief. Analysts’ reports cited “technical overshoot,” “election noise,” and “not a structural crisis.” State Street explicitly stated, “Japan’s debt is 90% domestically funded, unleveraged, and carries no forced-seller risk”—judgments that made sense in that static environment. But they overlooked one critical point: The January crisis could be ‘resolved’ only because four conditions coincided. Official reassurances were credible because the trigger was a political announcement—one that could be corrected or downplayed. U.S. cooperation was forthcoming because the JGB collapse pushed up U.S. Treasury yields, aligning American interests with stabilizing Japan. The central bank retained policy space because inflation, though at 3%, showed no acceleration—allowing it to maintain both hawkish resolve and dovish flexibility. And the crisis had an in-built endpoint: the February 8 election. All these conditions shared a common prerequisite: the absence of sustained external pressure. Five weeks later, the U.S. and Israel launched a military strike against Iran. V On February 28, 2026, the U.S. and Israel attacked Iran. In response, Iran’s Islamic Revolutionary Guard Corps (IRGC) announced the closure of the Strait of Hormuz. Tanker traffic ground nearly to a halt, cutting off roughly 20% of global oil and liquefied natural gas supply. Brent crude surged to a peak of $126 per barrel—the largest energy supply disruption since the 1970s oil crises.

Unexpectedly robust Japanese economic data pushes up rate-hike expectations; September policy decision may trigger a global carry-trade unwind

Please remember to like and share! If you haven’t yet subscribed, please follow the ‘Sanlang Macroeconomics’ account—thank you! Executive Summary: Japan’s August services PMI hit a five-month high; manufacturing PMI extended its expansion streak to eight consecutive months; the composite index rose. Strong domestic demand enabled firms to pass through rising costs, sustaining inflationary pressures and heightening market expectations for a Bank of Japan (BOJ) rate hike in September. Further pressure stems from the weak yen and elevated oil prices—and the U.S. is simultaneously urging Japan to raise rates. A BOJ rate hike would squeeze carry trades and potentially trigger turbulence across global financial markets. I. Japan’s revised August services PMI reached a five-month high; manufacturing PMI continued its eighth straight month of expansion. Last weekend, S&P Global released survey data showing Japan’s services Purchasing Managers’ Index (PMI) rose from 51.2% in July to 52.5% in August—indicating the fastest pace of services sector expansion in five months, driven by robust customer demand. Business activity and new orders continued expanding for the 26th consecutive month, and the growth rate accelerated further compared to July. Notably, new export orders contracted for the fifth consecutive month—at the steepest pace since November 2020—yet domestic demand remained persistently strong. Employment in the services sector registered its slowest monthly job-creation pace in a year—though still reflecting the 12th consecutive month of growth, a commendable performance. Input price inflation in services eased to a four-month low—but remains among the sharpest over the past three-and-a-half years. Meanwhile, output price inflation hit the second-highest level on record, confirming that firms are successfully passing higher input costs onto downstream customers amid strong demand. Amid this sustained services-sector expansion, Japan’s manufacturing sector also displayed remarkable resilience. Japan’s August manufacturing PMI was upwardly revised to 54.9%—slightly below the preliminary estimate of 55.1%, but still above July’s 54.5%, marking the eighth consecutive month of expansion. The survey also revealed that export order growth in manufacturing hit its fastest pace since early 2018, propelled by surging demand for chips and AI-related products. Raw material procurement rose steadily alongside production, yet supplier delivery times lengthened markedly—suggesting capacity constraints emerging in certain sectors. Japan’s broader composite PMI—which includes both manufacturing and services—rose to 53.5% in August, up 0.8 percentage points from July’s 52.7%, representing the strongest monthly gain since February. Annabel Fidels, Deputy Chief Economist at S&P Global Market Intelligence, commented: “Overall, Japan’s manufacturing sector looks set to remain robust—especially given strong demand linked to AI-related industries. Meanwhile, the latest PMI data shows the services sector gained momentum in August, with business confidence improving further from July.” Fidels added: “Persistent cost pressures suggest official inflation may rise further in the coming months—and as inflation strengthens, the case for another BOJ rate hike grows stronger.” II. Sustained, vigorous economic expansion has sharply elevated market expectations for a September rate hike. Following the release of the latest economic data, market expectations for a BOJ rate hike surged significantly.

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