United States vs Japan

The US-Japan pair is defined by the yield differential. For most of the past twenty-five years Japanese policy rates have been at or near zero while US policy rates have been materially higher, which makes the dollar-yen rate one of the most rate-sensitive currency pairs in the world. Japan is the largest foreign holder of US Treasuries, with around one trillion dollars of UST holdings across official reserves, pension funds, insurers, and banks. The carry trade, funded in yen and invested in higher-yielding dollar assets, is the largest cross-currency trade by notional and the source of recurring volatility episodes when it unwinds.

The Bank of Japan spent most of the 2013-2024 period running yield-curve control on the 10Y JGB, pinning it inside a narrow band through unlimited bond purchases. That policy was loosened and then ended in 2024, which opens the 10Y JGB to market-determined pricing for the first time in a decade. Japanese domestic investors are the largest owners of JGBs, but any persistent rise in JGB yields pulls capital home, which means the unwinding of yield-curve control can put upward pressure on US Treasury yields indirectly. On the real side, Japan is a large exporter to the US in autos and capital goods; a stronger dollar tends to lift Japanese corporate earnings measured in yen, so the Nikkei has a persistent negative correlation with the yen.

The read is the UST-JGB spread at the 10Y point, the Fed-BoJ policy-rate gap, and the dollar-yen rate versus its historical range. A narrower spread pulls capital home to Japan and typically strengthens the yen; a wider spread feeds the carry trade and weakens the yen. Watch 10Y UST-JGB, core CPI in both countries, the dollar-yen rate, and any signal from the BoJ on policy normalisation.