Markets may still fixate on the US consumer as the global demand engine and on AI as the new frontier of productivity, but for those who trade the tides rather than the headlines, the quiet churn beneath the surface matters more. And right now, that churn begins in Tokyo.
Japan has long been the silent counterweight to tightening cycles elsewhere—a liquidity spring that flows outward even as the Fed turns the taps off. But that spring may now be running dry. With long-term inflation expectations nudging closer to the Bank of Japan’s 2% target, the days of negative real yields in Japan may be numbered. And with that, a core pillar propping up the valuation edifice of US megacap tech could be pulled.
This is not about nominal yields ticking higher—those have already made the front page. What matters is the quiet creep in real yields. Up just 30bps this year, they remain negative, and that has allowed the tech trade to power on, seemingly immune. But the tether is real. Through 2019–2022, tech stock valuations moved in lockstep with US real yields. That correlation snapped when the liquidity anchor drifted across the Pacific. Should the Japanese real yield normalize, tech’s current altitude could prove unsustainable.
So the unspoken trade here is an unwind risk. The Nasdaq, floating on the helium of negative real Japanese yields, is vulnerable to a pinprick that may come not from a hawkish Fed, but from a policy shift in Tokyo. This justifies a structural overweight to the yen and a cautious stance on overstretched US tech multiples. The tech juggernaut may still roll, but its chassis is Japanese steel.
Meanwhile, on the other side of the Pacific, the US economy is navigating a very different set of crosswinds. The labour market has flipped—no longer a story of too few jobs but of too few workers. Trump’s tightening stance on immigration, paired with structural demographic limits, has turned the US economy into a supply-bound machine. Growth can no longer accelerate without fresh labour inputs, but unemployment won’t spike either. The result is a slow grind—economic output tethered by labour constraints, and inflation that proves annoyingly sticky. Hence, AI productivity will be forced to carry the baton, but that transition will take time.
This mini-stagflation regime is not recessionary per se—but it’s deeply unfriendly to long-duration assets and central bank credibility. Inflation has proven resilient, core CPI remains stubbornly above 2%, and the Fed’s toolkit looks increasingly blunt. At the same time, Trump’s repeated jabs at the Fed’s independence and his threat to impose forced debt restructurings on foreign bondholders have begun to erode confidence in the dollar as a policy anchor. It’s no longer unthinkable to underweight the greenback in multi-asset portfolios.
On the China front, the story is one of slow capitulation. The fiscal miracle that once supercharged Chinese growth has lost its channel. The ghost cities of yesterday—130 million unoccupied homes by some estimates—are now weighing on the very credit multipliers that once delivered double-digit GDP. Credit is being extended, but the transmission mechanism is broken. There’s simply no new boomtown waiting to soak up liquidity.
With inflation near zero and no new investment story on the horizon, real rates in China are too high for comfort. Yields have already started to slide, with 30-year Chinese bonds now yielding a full percentage point less than Japanese paper—a once inconceivable spread. But there’s more room to fall. A sub-1% yield on China’s 10-year is no longer a moonshot. In a world starved for true duration trades, Chinese government bonds stand out as a structural overweight.
Across markets, fragility is creeping in—not in prices, but in market function. When every investor becomes a trend follower and the investment horizon collapses into the next CPI print or dot plot, complexity dies. A healthy market is like a rainforest—rich with diversity in views, timeframes, and signals. Fragile markets resemble monocultures: efficient until disrupted, and then dangerously brittle.
When complexity collapses, liquidity vanishes not in volume but in depth. The moment one player—especially a value anchor—decides to de-risk, there’s no one left to take the other side except deep-value players far from the current price. That’s how cracks form. Fragility is a process, not a moment. But when the moment comes, the repricing is swift.
Tactically, the market offers a few clean expressions. Short EUR/JPY is a dual bet—one side driven by the slow but inevitable normalization of Japan’s real yields, the other capped by Europe’s structural growth ceiling and fiscal inertia. As Japan edges toward monetary rearmament, Europe remains stuck in neutral, weighed down by a fragmented policy engine, stagnant productivity, and social welfare programs stretched to the limit. The trade captures both asymmetries in direction and mispricings in pace.