Société Générale’s Albert Edwards is sounding the alarm over a potential disruption in global markets driven by a sharp rise in Japanese government bond (JGB) yields—a development he believes could trigger what he calls a “global financial market Armageddon.”
In a recent note to clients, Edwards argues that the rapid increase in long-dated JGB yields—fueled by persistent inflation pressures, heightened fiscal concerns, and reduced intervention from the Bank of Japan—has significant implications for U.S. equities and Treasuries. His core concern centers on the unraveling of the yen carry trade, a strategy that has helped underpin global risk asset valuations for years.
For advisors and portfolio managers, the thesis is particularly relevant: If rising Japanese yields continue to entice capital back into domestic markets, Japanese investors may unwind positions in higher-yielding foreign assets, including U.S. stocks and bonds. That potential flow reversal, Edwards contends, would exert downward pressure on U.S. financial markets that have grown dependent on overseas capital.
“Both U.S. Treasury and equity markets are vulnerable, having been inflated by Japanese flows of funds,” Edwards wrote. “If sharply higher JGB yields entice Japanese investors to return home, the unwinding of the carry trade could cause a loud sucking sound in U.S. financial assets.” He urged investors to track the Japanese bond market closely, emphasizing that developments there could prove more consequential than any single macro indicator currently on the radar.
The dynamics driving Japan’s bond market are distinct from those seen in the U.S. or Europe. For years, the Bank of Japan maintained ultra-loose monetary policy, keeping interest rates near zero and anchoring long-term yields through aggressive bond purchases under its yield curve control policy. This suppression of yields made Japanese bonds unattractive relative to foreign assets, prompting investors to seek higher returns abroad, often using yen-denominated debt to fund those trades.
However, that regime is now changing. The BOJ has begun dialing back its support for the bond market, allowing maturing bonds to roll off its balance sheet and signaling a gradual normalization of policy amid sticky inflation. As a result, long-term JGB yields have risen sharply, threatening to reverse capital flows that have helped bolster global asset prices—especially in the U.S.
Edwards points to last year’s market episode as a cautionary tale. In July and August 2024, an unexpected policy shift by the BOJ sent the S&P 500 down 6% over just a few weeks, underscoring how sensitive global markets can be to shifts in Japanese policy. The strategist now sees a similar setup emerging, with the potential for more pronounced volatility ahead.
“If, like us, you believe BOJ QE has been pivotal to U.S. bubble equity valuations, then the ongoing JGB rout is a game changer,” Edwards wrote.
For wealth advisors and institutional allocators, the implications are multifaceted. A sustained rise in JGB yields could lead to upward pressure on global interest rates, tighter financial conditions, and a potential derating of equity markets—particularly those trading at elevated valuations. In practical terms, that might prompt a reassessment of asset allocations, especially for portfolios with overweight exposure to U.S. equities or duration-sensitive fixed income positions.
The yen carry trade is a key mechanism through which these cross-border effects manifest. By borrowing at ultra-low rates in yen and investing in higher-yielding global assets, investors have not only supported risk markets but also helped suppress volatility. As this trade unwinds, both of those effects could reverse, increasing market fragility.
While not a new concern, Edwards argues that the current backdrop heightens the risks. The BOJ’s reduced bond purchases, persistent inflation at home, and the relative unattractiveness of foreign bond yields when hedged into yen all tilt the calculus in favor of capital repatriation.
Adding to the complexity is the composition of the JGB market itself. Foreign investors now represent a large share of trading volume, and their reaction to rising yields could amplify volatility. If international holders begin to offload Japanese debt amid uncertainty over further policy tightening or fiscal deterioration, the feedback loop could become self-reinforcing.
For U.S.-based advisors, the risk is not just academic. Should a sizable unwind of Japanese capital out of U.S. assets materialize, it could coincide with existing vulnerabilities, including stretched equity valuations, elevated interest rate sensitivity, and geopolitical tensions. The resulting market dislocations would challenge portfolio resilience and underscore the need for global macro awareness in asset allocation decisions.
Edwards also reminds investors of Japan’s historical role as a harbinger of financial turning points. “Major financial events often happen first in Japan,” he wrote, citing the late-1990s tech bubble, which first burst in Tokyo before cascading into global markets.
From a strategic perspective, advisors might consider taking steps now to mitigate downside exposure. These could include increasing allocations to cash or short-duration fixed income, diversifying internationally with currency risk in mind, and stress-testing portfolios against interest rate shocks. Given the potential for correlated asset declines in an unwind scenario, liquidity management and defensive positioning may take on greater importance in the quarters ahead.
While Edwards is known for his bearish macro views, his warning aligns with a growing number of market participants voicing concerns about the stability of global cross-border capital flows. With central bank policy divergences becoming more pronounced and inflation dynamics varying sharply across regions, the likelihood of asymmetric market responses continues to rise.
In this context, Japan’s seemingly local bond market developments may have disproportionate global impact—particularly for U.S. investors who have long benefited from the liquidity and risk appetite enabled by the yen carry trade.
Whether or not Edwards’ “Armageddon” scenario plays out in full, the message is clear: what happens in Tokyo won't stay in Tokyo. For RIAs, the takeaway is to treat Japan’s bond market not as a regional sideshow but as a bellwether for broader macro trends that could directly affect client portfolios in the near term.
