Analysts Sound Alarm on Currency and Debt Market Feedback Loop

Economists at Mitsubishi UFJ Financial Group (MUFG) have issued a stark warning that the Japanese Yen's continued depreciation threatens to destabilise the nation's colossal Government Bond (JGB) market. The analysis suggests a dangerous feedback loop is forming, where a weaker yen fuels inflation expectations, forcing the Bank of Japan (BoJ) to reconsider its ultra-loose monetary policy sooner than anticipated.

This potential policy shift could trigger a sharp sell-off in JGBs, as investors demand higher yields. Such volatility in the world's second-largest sovereign debt market would have global repercussions, increasing borrowing costs and creating ripple effects across international financial systems.

The Core Mechanism of the Threat

The primary concern hinges on imported inflation. A significantly weaker yen makes imports, particularly energy and commodities priced in US dollars, far more expensive for Japanese businesses and consumers.

  • This sustained price pressure could force the BoJ to finally abandon its long-held negative interest rate policy and yield curve control framework.
  • An abrupt end to these policies would likely cause JGB yields to spike rapidly as the market reprices risk.
  • Higher domestic yields could, in turn, attract capital flows back to yen assets, causing sudden and volatile currency strength—a whiplash effect for global FX markets.

The MUFG report underscores the fragile balancing act facing Japanese policymakers, who must manage currency stability, government debt servicing costs, and inflation targets simultaneously.