While the US is wary of a sharp rise in interest rates, concern is also growing over the risk of market turmoil originating in Japan. Much discussion has focused on the possibility that yen depreciation and developments in the Japanese bond market could spill over.
The US is wary of market turmoil against the backdrop of a sharp rise in interest rates, and the possibility that market turmoil originating in Japan could spill over is also being raised. Some commentary suggests that coordinated intervention may be under consideration to curb rising US Treasury yields.
Market participants are debating the relationship between yen depreciation and falling bond prices, with some arguing that yen depreciation would not immediately lead to selling of US Treasuries. At the same time, concern has been raised that yen depreciation and expectations for Bank of Japan monetary policy could affect leveraged trades such as the yen carry trade.
Some view the role Japanese government bonds have played as a benchmark for long-term interest rates as being in transition, and there is also a perception that rising fiscal risks in Japan could affect US Treasury market developments.
There are also views that the Bank of Japan's bond-purchase policy as a means of suppressing long-term interest rates could encourage yen depreciation and create conditions unfavourable to the US. Market developments going forward are being closely watched.