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Some economists think the BOJ will continue tightening.“With the economy holding up well and tariff-related uncertainties abating, the [BOJ] should feel comfortable with resuming policy normalization before long,” said Abhijit Surya, economist at Capital Economics.

Yet as economist Annabel Fiddes at S&P Global Market Intelligence pointed out, soft domestic demand and a darkening external scene are complicating Japan's year. A“recovery in manufacturing output may be hard to sustain unless we see an improvement in sales in the near-term,” Fiddes said.

The plot thickens when you consider why JGB yields are returning to 1999 levels: worries that Tokyo is about to open the fiscal floodgates to juice the economy.

Japan has by far the worst debt burden among developed nations. By some measures, it's 260% of gross domestic product. That might seem less troubling if Japan's population weren't shrinking and aging at a rate that worries demographers as much as holders of 20-, 30- and 40-year JGBs.

An added complication: how dismally the ruling Liberal Democratic Party performed in July elections. Odds are good that embattled Prime Minister Shigeru Ishiba will green-light increased public spending, a step that might irk credit rating companies.

“Looking ahead, with concerns about fiscal expansion remaining strong, the ultra-long-term zone as a whole is likely to face upward pressure,” wrote analysts at Mizuho Securities.

In July, net foreign purchases of JGBs maturing after 2045 fell to just $3.3 billion. That was just a third of the level of purchases in June, a sign Japanese debt may be losing its safe-haven bid.

On August 19, the MOF attracted only tepid demand for a sale of 20-year sovereign bonds. It's become something of a pattern. Weak auctions in June and July spooked investors, too.

As Tokyo has difficulty selling JGBs, the yen could be vulnerable. A sudden yen plunge could have two immediate implications.

One is the so-called“yen-carry trade” blowing up. Japanese rates at zero since 1999 turned Japan into the globe's top creditor nation. For decades, investment funds borrowed cheaply in yen to bet on higher-yielding assets around the globe.

As such, sudden yen moves slam markets virtually everywhere. It became one of the globe's most crowded trades, one uniquely prone to correction. Arif Husain, head of fixed income at T. Rowe Price, calls the yen-carry trade the“San Andreas fault of finance.”

Another: a weaker yen would surely provoke the ire of the Trump White House. The slightest suggestion Tokyo is manipulating exchange rates could have Trump threatening to increase the 15% tariff rate. Since the specifics of the US-Japan tariff arrangement aren't written down on paper, Trump could always renege.

Tokyo worries a sliding yen would have Trump gunning for Ishiba. This could include Trump's Treasury Department slapping the dreaded“currency manipulator” label on Tokyo.

This has Japanese officials anxious to manage the currency - and to keep the yen off the radar screen. The BOJ and Finance Minister Katsunobu Kato have so far managed to limit the yen's downside.

Suspicions are rife that Trump is pressuring Treasury Secretary Bessent - a hedge fund veteran who presumably knows better than - to weaken the dollar . This goal is partly why Trump is prodding the Fed to slash borrowing costs.

Trump has threatened to fire Fed Chair Jerome Powell. He's calling on Fed Governor Lisa Cook to resign and has his Justice Department investigating her. As Trump damages trust in the Fed's independence one social media post at a time, the dollar's troubles are mounting in real time.

Asia worries Trump will force Bessent to depreciate the dollar unilaterally, perhaps using currency intervention. Or perhaps even default on US debt. On the campaign trail last October, Trump said of Democrats:“I say to the Republicans out there – Congressmen, Senators – if they don't give you massive cuts, you're going to have to do a default.”

Trump's dangerous flirtation with a default on US debt reared its head on the campaign trail in 2016. At the time, he told CNBC,“I would borrow, knowing that if the economy crashed, you could make a deal. And if the economy was good, it was good. So therefore, you can't lose.”

In 2020, the Washington Post reported that the Trump White House mulled cancelling debt held by Beijing amid trade tensions . With the US national debt twice the size of Chinese GDP, it's not hard to understand how much of a financial earthquake that would be.