Japan Is Raising Your Mortgage Rate, Too

Japan Is Raising Your Mortgage Rate, Too

The next time someone tells you mortgage rates are rising solely because of oil prices, you may want to point them toward Tokyo.

Oil is certainly part of the story. Higher energy prices create inflation concerns, and inflation concerns tend to push bond yields higher. But underneath that obvious explanation, another drama has been playing out in the global bond and currency markets. Japan is trying to defend the yen, and the methods it uses can create additional selling pressure in the U.S. Treasury market.

That matters because your mortgage is not priced directly from the Federal Reserve’s overnight interest rate. Thirty-year mortgage rates tend to track the yield on mortgage-backed securities, which in turn are heavily influenced by longer-term Treasury yields—particularly the 10-year Treasury—plus an additional spread for credit, liquidity, prepayment and other risks. When the 10-year Treasury yield rises, mortgage rates generally rise with it.

In other words, the Fed does not personally set the rate on your next mortgage. The global bond market does.

The Problem in Japan

The Japanese yen recently fell to approximately 164 yen to the dollar, its weakest level in roughly 40 years. That is not simply an interesting fact for someone planning a vacation to Kyoto. A weak yen makes imported goods more expensive for Japanese consumers, and Japan imports much of its energy, food and raw materials.

Japan has spent decades dealing with sluggish economic growth, an aging and shrinking population, very high government debt and persistent deflationary pressure. To stimulate the economy, the Bank of Japan kept interest rates at or below zero for years while purchasing enormous quantities of Japanese government bonds. Although the Bank of Japan has begun normalizing policy, its current rate is only 1%, compared with the Federal Reserve’s target range of 3.5% to 3.75%. That gap continues to make the dollar far more attractive than the yen.

Japan is also experiencing the unfamiliar problem of meaningful food inflation. Rice prices more than doubled at one point in 2025 following a disappointing harvest and disruptions in the country’s distribution system. The government responded by releasing hundreds of thousands of tons from its strategic rice reserves and selling some of that supply directly to retailers. Prices have since moderated, but rice remains a surprisingly important political and economic issue in a country where it is both a staple and a cultural institution.

The Japanese government is trying to thread a very small needle. It is using fuel subsidies and other household assistance to offset higher living costs while encouraging wage growth and supporting the economy. Meanwhile, the Bank of Japan is gradually raising rates, but it cannot move too quickly without risking weaker growth, falling asset prices and much higher interest expense on Japan’s enormous government debt. The result is a policy that is tighter than it used to be but still loose enough to place continuing pressure on the yen.

Defending the Yen Means Finding Dollars

When Japan intervenes to strengthen its currency, it buys yen and sells foreign currency—usually dollars. But those dollars have to come from somewhere.  A significant portion of Japan’s dollar reserves is invested in U.S. Treasury securities. Japan remains the largest foreign holder of Treasuries, with holdings of more than $1.1 trillion. Those Treasuries are effectively Japan’s dollar-denominated piggy bank.

At the end of July, Bank of Japan account data suggested that Japan may have spent as much as approximately $59 billion in a single yen-buying operation. Japan had already spent roughly $73 billion during interventions in April and May, only to watch the yen eventually fall back to new lows.

Not every dollar used in an intervention necessarily comes from an immediate Treasury sale. Japan maintains cash balances and other foreign assets as well. But if it must repeatedly raise large amounts of dollars, Treasury securities are an obvious source of funding. A large, price-insensitive seller arriving in the Treasury market is not particularly helpful when the United States is already issuing a substantial amount of new debt.

The 10-year Treasury yield recently moved toward 4.7%, near its highest level in roughly 18 months, while the 30-year Treasury reached approximately 5.23%, its highest yield since 2007. Oil prices, inflation expectations, Treasury issuance and questions about Federal Reserve policy have all contributed. Japan is not the sole cause, but its potential selling adds another weight to an already heavily loaded bond market.

Washington Joins the Currency Trade

Washington has clearly noticed the connection.  On July 31, U.S. authorities joined Japan in buying yen for the first coordinated U.S.-Japanese yen-support operation since 1998. Interestingly, the United States reportedly funded its purchase by selling euros rather than dollars, allowing it to support the yen without directly weakening the dollar.

Japan has also discussed using the Federal Reserve’s existing Foreign and International Monetary Authorities, or FIMA, repo facility. That facility allows approved foreign institutions to temporarily borrow dollars against their Treasury holdings rather than selling those Treasuries outright. It was created in 2020 and later made permanent precisely because forced foreign selling can create instability in the Treasury market.  These measures may reduce immediate selling pressure, but they do not eliminate the basic problem: Japanese rates remain substantially below U.S. rates.

The Yen Carry Trade

That rate gap has helped fuel what is known as the yen carry trade. Investors borrow in yen at relatively low interest rates, convert the money into another currency and invest it in higher-yielding bonds, stocks, technology companies, cryptocurrencies or other risk assets.  Read my blog from December 2, 2025, if you’d like to read more about the Yen Carry Trade.  https://www.baumanscott.com/blog/yen-carry-trade-unwind-just-hit-crypto-and-growth-stocks-heres-what-actually-happened

It can be a wonderful trade while the yen remains weak and markets remain calm. The investor earns the difference between the cheap borrowing cost and the return on the purchased investment.  The difficulty comes when the yen suddenly strengthens. Investors must buy yen to repay their loans, which can force them to sell whatever assets they originally purchased. The selling pushes the yen higher, triggers additional losses and forces still more investors to unwind. What began as a currency move can quickly become a stock, bond and cryptocurrency problem.

We saw a particularly violent example in August 2024, when a rapid yen rally and leveraged deleveraging helped send Japan’s TOPIX down 12% in one day. The S&P 500 fell 3%, volatility surged and cryptocurrencies experienced sharp losses before markets stabilized. The Bank for International Settlements estimated that yen carry-trade exposure going into that episode may have been approximately $250 billion—and even that estimate may have been conservative.

We have seen several smaller versions of the same basic unwind since then. The participants, positioning and catalysts may change, but the mechanics are familiar: cheap yen finances crowded investments, the yen unexpectedly strengthens, and everyone attempts to exit through the same door.

What This Means for Homebuyers and Investors

Freddie Mac’s average 30-year mortgage rate rose from 6.43% at the beginning of July to 6.66% by July 30. At those rates, the same principal-and-interest payment finances approximately 2% less mortgage than it did at the beginning of the month. Compared with the late-February low of 5.98%, purchasing power has declined by approximately 7%.

The larger point is that financial markets are interconnected in ways that are not always obvious. A weak currency in Japan can lead to intervention, intervention can create Treasury selling, Treasury selling can push yields higher, and higher yields can affect mortgages, corporate borrowing costs, stock valuations and the price investors are willing to pay for long-duration assets.

Japan cannot permanently reverse the yen’s trend through intervention alone. A sustained change probably requires a smaller interest-rate gap, stronger Japanese economic fundamentals, lower imported energy costs or some combination of the three. Intervention may buy time, but time is mostly what it buys.

For investors, this does not mean panicking every time the yen moves a few percent. It does mean recognizing that Japan is no longer an isolated corner of the global market. It is a major creditor, a source of inexpensive financing and an increasingly important influence on Treasury yields and market liquidity.

As always, if you would like to discuss the yen’s effect on our markets, your portfolio, or how the price of a bowl of rice in Tokyo found its way into an American mortgage payment, please give us a call.

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