You Did Not Think the Japanese Bond Market Matters — But It Does to Your Retirement

By Miika Makela | WBN News Vancouver | May 29, 2025
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When retirees in Canada and the United States think about their financial well-being, the Japanese bond market is probably the last thing on their minds. It feels distant — geographically, economically, and culturally. But in today’s global financial system, what happens in Japan can quietly influence the performance of retirement portfolios across North America. One of the key ways this happens is through something known as the “carry trade.”

Japan has one of the largest bond markets in the world, valued at over $9 trillion. For decades, the Bank of Japan (BOJ) has pursued ultra-low interest rates — even dipping into negative territory — in an effort to stimulate the economy. As a result, Japanese government bonds offer extremely low returns, making them unattractive as investments. However, this low interest rate environment has made the Japanese yen an ideal funding currency for international investors.

This is where the carry trade comes in. Investors borrow in yen at extremely low interest rates and use those funds to invest in higher-yielding assets abroad — including in Canada and the U.S. These investments can range from government and corporate bonds to equities and real estate. In effect, cheap Japanese money flows into North American markets, helping to inflate asset values.

If you are retired or planning for retirement, this global flow of capital can directly affect the value of your investment portfolio. When Japanese interest rates are low, the carry trade adds liquidity to North American markets, pushing up the value of stocks and bonds. But when there are signs that the BOJ might shift direction — such as tightening monetary policy or allowing bond yields to rise — the carry trade can unwind quickly.

That’s where the risk lies. A sudden increase in Japanese bond yields could trigger large-scale selling of North American assets, as investors rush to repay their yen-denominated loans. This would put downward pressure on asset prices, potentially hitting the value of the very investments that retirees depend on for income and financial security.

Currency fluctuations can add to the volatility. If the yen strengthens, the cost of repaying yen loans rises, accelerating the rush to liquidate foreign investments. That ripple effect can lead to broader market instability — something that impacts not just large institutions, but also individual investors and retirees whose portfolios are exposed to market swings.

The Japanese bond market may seem remote, but its influence stretches across continents. For retirees in Canada and the U.S., it’s a reminder that financial stability is increasingly tied to global factors. Understanding the dynamics of the carry trade and how central banks interact across the globe is no longer the domain of professional economists alone.

So yes — the Japanese bond market matters. It matters because it shapes global investment flows. It matters because it influences asset values in your retirement portfolio. And it matters because a policy shift in Tokyo can send shockwaves through Toronto and Vancouver just as easily as it can through New York or Chicago. In an interconnected financial world, staying informed globally is part of securing your future locally.

Miika Makela, CFA

https://www.linkedin.com/in/miika-makela-cfa-24aa056/ 

#Global Markets #Japanese Economy #Carry Trade #Retirement Planning #Investment Strategy #Bond Markets #Financial Literacy