Japan's financial markets are experiencing a simultaneous collapse in stocks, bonds, and currency, sparking concerns of a potential capital flight. Deutsche Bank has issued a warning, stating that the current turbulence in Japan is more alarming than recent volatility in US equities, drawing parallels to the 2022 crisis that nearly devastated UK bond markets.
The turmoil intensified on Thursday, with the Nikkei 225 Index opening lower and plunging nearly 3% at one point. Individual stocks suffered steep declines, with SoftBank Group tumbling 11% to a recent low, while Kioxia Holdings saw its shares plummet as much as 16% intraday.
Meanwhile, the yen weakened to its lowest level since January this year, approaching a threshold that could trigger intervention by the Bank of Japan. The bond market also faced pressure, with yields on 30-year Japanese government bonds (JGBs) surging to multi-decade highs.
The root of this chain reaction lies in growing market concerns over Japan's new fiscal policies. Reports indicate the government is preparing its largest stimulus package since the pandemic. George Saravelos, Global Head of FX Research at Deutsche Bank, warned that this massive spending plan, coupled with the central bank's persistently dovish stance, is fueling fears of deteriorating fiscal health and eroding investor confidence in Japanese assets.
Albert Edwards, Global Strategist at Société Générale, echoed these concerns, describing the rise in long-term JGB yields as a "major warning signal largely ignored by investors." Analysts caution that if investors lose faith in Japan's commitment to maintaining low inflation, a sell-off in domestic assets could accelerate, potentially triggering destabilizing capital outflows.
**Triple Plunge Signals Widening Capital Flight** Deutsche Bank highlighted in a report titled "This Is Worrying" that both the yen and 30-year JGBs have fallen over 5% in recent weeks, while global fixed-income markets rebounded. This divergence underscores Japan's unique predicament.
The sharp drop in Japanese equities is seen as a clear sign of spreading pessimism. Saravelos warned that if bond and currency market volatility spills into already fragile stocks, it would signal an expansion of capital flight. Thursday's trading appeared to confirm this view, with 30-year JGB yields climbing above 3.35%, up from around 3% earlier this month.
**Deutsche Bank Warns of 2022 UK-Style Crisis** Saravelos compared Japan's situation to the UK's "Truss Crisis" in 2022, when unfunded tax cuts proposed by then-Prime Minister Liz Truss triggered panic, sending the pound to a 37-year low and nearly collapsing the UK gilt market. He noted that Japan is now showing similar signs of "lost confidence" in domestic assets.
"Both the yen and long-end JGBs are decoupling from any fair-value metrics, with intraday correlations accelerating," he said. Japan's long-standing stability, he explained, relies on high public debt paired with substantial private savings—a balance underpinned by stable inflation expectations. If domestic investors lose faith in policymakers' ability to control inflation, "the rationale for holding JGBs disappears, and capital outflows could intensify."
However, the report noted that unlike the UK crisis—exacerbated by leveraged pension funds—there is no evidence of similar leverage risks in Japan.
**Massive Stimulus and Dovish Central Bank Fuel Fears** The immediate trigger for the sell-off was reports of Japan's new Prime Minister's expansive spending plan, which would mark the largest fiscal package since COVID-19. Investors fear such stimulus, combined with the Bank of Japan's reluctance to tighten policy, will inevitably worsen fiscal conditions.
Saravelos emphasized that Japan's stability hinges on its "high debt, high savings" structure—the world's largest government bond market relative to GDP, paired with one of the wealthiest household sectors. But this system's sustainability ultimately depends on stable inflation expectations. If domestic confidence falters, the entire framework could unravel.
Edwards added that while the yield rise isn't yet a "panic sell-off," it is "relentless and slow-moving." He predicted: "This Japanese-led long-term bear market in government bonds will inevitably reverse the overvaluation of stocks and real estate seen over the past 40 years."
**Next Focus: Capital Flight and Policy Response** For now, Japanese authorities appear tolerant of market swings. But Saravelos questioned how long this stance could hold if trends persist. "We will closely monitor whether broader capital flight emerges in coming weeks," he said. Key signals would include spillover into equities and sustained JGB divergence from global fixed-income trends.
For investors, Japan's "triple plunge" signals rising systemic risks. Unlike short-term US stock volatility, capital flight driven by lost faith in fiscal and monetary policies could have far deeper and more destructive consequences.
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