Markets Weekly: Japan’s Bond Shock and the Global Ripple Effect

Summary

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Merryn Talks Money – Markets Weekly: Japan’s Bond Shock and the Global Ripple Effect

Host: Merryn Somerset Webb
Guest: John Stepek, Senior Reporter at Bloomberg
Date: January 23, 2026

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Overview

This week’s episode provides an in-depth look at the dramatic moves in global markets triggered by the recent shock in Japanese bond yields, exploring the implications for international capital flows, equities, commodities, and the outlook for the UK market. Merryn Somerset Webb and John Stepek break down the politics driving Japan’s surprise election, debate the tension between capitalism and democracy as economic forces, and discuss potential winners in a rapidly rebalancing global investment landscape—with their signature candid, insightful banter.

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Key Discussion Points & Insights

The Immediate Shock: Japan’s Snap Election and Bond Market Turmoil

• [02:07 – 03:49]
  • Japanese PM called a snap election, promising to cut sales tax on food from 8% to 0% for two years—an “arms race” of fiscal giveaways.
  • Opposition parties propose even more radical cuts, fueling market worries about debt and deficits.
  • Yields on Japanese government bonds spike—40-year bonds above 4%, 10-year above 2%, levels unseen for decades.
• Quote:

  “You need to bribe the electorate whenever you’re going to go for an election. … No one’s saying, ‘oh, that’s a really daft idea, that’s really expensive.’ Instead, they’re all competing to make even greater promises.”
  — John Stepek [02:56]

Democracy, Capitalism, Inflation, and Deflation

• [03:49 – 05:07]
  • Democracy is naturally inflationary (spending promises to voters), while capitalism is deflationary (competition, efficiency).
  • Japan’s long era of deflation might be ending, unleashing inflationary political pressures.
  • Historical parallels: Even nondemocracies (like Ancient Rome) ultimately succumb to inflation pressures when mismanaging economies.
• Quote:

  “The natural state of a democracy is generally inflationary, right? ... There’s a constant tension across all types of capitalist democracies.”
  — Merryn Somerset Webb [03:49]

Japanese Yields: Global Contagion and Capital Flows

• [05:25 – 07:24]
  • Rising Japanese yields increase yields worldwide, raising the risk money flows back to Japan from global markets.
  • The “yen carry trade” reversal may prompt Japanese investors to sell overseas holdings (notably US tech stocks) to buy domestic bonds.
  • Recent US market moves (e.g., NASDAQ downturn) may relate more to Japanese capital flows than Trump’s “saber-rattling” over Greenland.
• Quote:

  “If you buy into [Japanese bonds], particularly if you think the yen’s going to appreciate, then actually probably not a bad place to buy JGBs. … You might see a whole lot of money sucked out of the US stock market and back into Japanese government.”
  — John Stepek [06:21]

Long-term Rebalancing Away from the US

• [07:55 – 09:02]
  • Anticipation of a “consistent rebalancing” away from US assets, as the US share of global indices is historically high (~67-70%).
  • Europe’s talk of divesting US assets is more rhetoric than reality, but broader reallocation is underway.
  • The move is overdue for reasons of diversification; Trump’s policies act as a catalyst, not a cause.
• Quote:

  “It’s kind of crazy that so much global capital is in the US—way more than represents sensible diversification… So definitely, obviously Trump is a catalyst for that, but it’s a move that has been on the cards for a long time.”
  — John Stepek [08:26]

The Commodities Supercycle and Gold/Silver Mania

• [10:14 – 11:51]
  • Surging demand and policy shifts signal a commodities “super cycle.”
  • Silver approaches $100/oz; gold remains strong as geopolitical risk mounts.
  • Mark Carney’s Davos remarks—“the old rules based order is dead”—seen as confirmation of a profound, possibly contrarian macro shift.
• Quote:

  “The old rules based order is dead. … It probably represents the final turning point for economies back inwards, where they start re-industrializing, start really focusing on energy security…”
  — Merryn Somerset Webb (recapping Carney) [11:28]

UK Market’s Opportunity as Global Capital Shifts

• [12:32 – 14:34]

  • The UK, “still the third largest stock market in the world,” could benefit as money flows out of the US.
  • The FTSE 100’s strong performance and concentration in “old fashioned” stocks (like miners) positions it well for the next phase.
  • Recent regulatory reforms aim to attract retail investors and boost listings.
  • Both the UK and Japan have relatively weak currencies, appealing to global investors.

• Quote:

  “If you’re looking to move money out of the US, you might think to yourself, well, do you know the FTSE 100 doesn’t look too bad, particularly given all those miners and all that old fashioned stuff that nobody ever wanted before they may now want.”
  — Merryn Somerset Webb [13:34]

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Notable Quotes & Memorable Moments

• On snap elections and fiscal populism:

  “…Clearly hasn’t spoken to Theresa May recently.”
  — Merryn Somerset Webb, referring to the Japanese PM’s snap election [02:52]

• On the arms race of giveaways:

  “It’s sort of almost an arms race.”
  — John Stepek [03:29]

• On commodities:

  “Silver is within sniffing distance to $100 an ounce now. I never thought I’d see that.”
  — John Stepek [10:21]

• On gold and silver nostalgia:

  “Do you remember how excited we were when it went through 50?” — Merryn Somerset Webb
  “Why don’t I own any is my main question.” — John Stepek [10:28–10:35]

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Timestamps for Key Segments

• [02:07] – Japanese politics & bond market shock
• [03:49] – Inflation: Democracy vs. capitalism
• [05:25] – Japanese yields’ impact on global flows
• [07:55] – Global rebalancing away from US markets
• [10:14] – Gold, silver, and commodity supercycle
• [12:32] – Opportunities for the UK market
• [15:10] – Key takeaways & summary

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Summary / Takeaways

• Watch Japan: Political wrangling and fiscal promises are shaking global markets, starting with soaring Japanese bond yields and shifting capital flows.
• US Market Vulnerability: US equities may face more selling if Japanese and global investors bring money home or pursue better diversification.
• Commodities and Old-Economy Winners: Gold, silver, and resource-rich stock markets (like the UK) stand to benefit as geopolitical risks and strategic stockpiling build momentum.
• Regulatory Reform Tailwinds: The UK’s “old fashioned” market and evolving regulation may attract new investment as funds rebalance worldwide.
• Keep One Eye on Politics: Developments in Japan, the US, and European rhetoric shape risk, but deeper macroeconomic trends—like the revival of inflation and the end of the “rules-based order”—are in play.

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For more, follow Merryn Somerset Webb and John Stepek on X/Twitter (@erinagew and @johnstepek).

Transcript

[Michael McDermott]

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[Maris Amset Webb]

Foreign. Welcome to the marindogs Money Market Wrap where we talk about the biggest moves in the markets this week and what is driving them. I'm Maris Amset Webb, editor at large of Bloomberg UK wealth, and I'm Join.

[John Stebig]

Stebig, senior reporter at Bloomberg and author of the Money Distilled newsletter.

[Maris Amset Webb]

Okay, well, John, when we talk about what's driving the moves in market, there's become much doubt there. I will say before we get going that you and I are speaking, but before President Trump speaks at Davos.

[John Stebig]

Yes.

[Maris Amset Webb]

So he's been saying a lot of things this week. A lot of social media on the go, a lot of messages, a lot of publishing of other people's messages, lot going on. But he hasn't actually spoken yet. So there may be some fairly massive market moves when he has finished speaking.

[John Stebig]

Yeah, and he has been a busy boy this week. Although actually he's not the only thing that's moving markets. It's actually the Japanese election promises that have been moving markets in quite a an extraordinary way at the start of the week.

[Maris Amset Webb]

It's interesting, isn't it? And you might think looking around the world geopolitically, that the most important thing would be the idea that America might annex Greenland against the will of the rest of the world. But in fact, Japanese bond yields have had more impact.

[John Stebig]

I think actually it's probably worth starting with. And then we can talk about Trump. Because what happened in Japan is the Japanese bond market yields spaked because the Japanese Prime Minister there has called a snap election to shore up her power. Clearly hasn't spoken to Theresa May recently.

[Maris Amset Webb]

What happens with snap elections elsewhere? But anyway, on we go.

[John Stebig]

And of course you need to bribe the electorate whenever you're going to go for an election. And one of the hard particular choice has been to say, well, look, for the next two years we're going to knock off the equivalent Japanese VAT, the sales tax on food, so it's currently 8%, reduce it to 0%. Now, the thing is, obviously Japan has got a massive debt to GDP ratio and markets are sort of going, well, wait a minute, how are you going to pay for this? She's sort of saying, well, we're not going to have to issue more bonds to pay for it. But she hasn't actually said how they will pay for it. And the other thing is that the opposition parties, no one's saying, oh, that's a really daft idea, that's really expensive. Instead they're all competing to make even greater promises. So, oh, well, you'll scrap it for two years, we'll scrap it for good. How about we actually cut the entire vehicle 380 and half from 10% to 5%. And so there's this sort of almost arms race.

[Maris Amset Webb]

Yeah, well, it's interesting, isn't it, that the, the natural state of a democracy is generally inflationary. Right, yeah, yeah. I was reading the, reading about this the other day. You know that, that democracy is naturally inflationary, but the, the point was that capitalism is naturally deflationary. Right. Capitalism tends to bring prices of stuff down over time. And so there's a constant tension across all types of capitalist democracies between the democracy side, which is inflationary, and the capitalist side, which is deflationary. And that deflationary side has been winning in Japan for a long time. But now the naturally inflationary side of a democratic society is rising to the fore.

[John Stebig]

Yeah, and that is really freaking people out because by our standards, I suppose Japanese inflation isn't that high or certainly not compared to what we've got used to. That is actually an interesting point because I think the problem with any form rule actually is that if your economy stops functioning properly, then your way to keep the vested interests and the people happy is always inflationary. Ancient Rome was not a democracy, but it still kind of destroyed itself through currency debasement and hyperinflation. So I don't.

[Maris Amset Webb]

Over a tangent, John. Over a tangent.

[John Stebig]

I like to defend democracy because there are too many people who are against it at the moment. A bit kind of worried about that. I am very pro democracy. Pro democracy.

[Maris Amset Webb]

Everybody in our studio here is pro democracy. Just checking with the producer. Yeah, we're all good. So you can leave that for now.

[John Stebig]

Let's back to bond yields point deals. Yeah, so anyway, the Japanese point yield spake like the 40 year went above 4% for the first time ever. I mean, okay, they were only issued in 2007. Japanese 10 year went above 2%, which we haven't seen for decades. And it can spill over into the rest of the market as well. And so it's just another reminder that bond yields are jittery, political risk, premia and that all obviously Greenland feeds into that. The kind of chaos, if you like, feeds into that.

[Maris Amset Webb]

But rising bond yields in Japan affect the rest of the world, right? Yes, they push up bond yields everywhere a little bit and also create the risk that capital that has long been flowing out of Japan looking for higher yields will flow back into Japan because you can get the yield there. And that pulls capital out of all of our economies and could have as yet unknown effects.

[John Stebig]

Yeah, definitely. I mean in August 2024 there was a big kind of surprise crash in the market. And that was driven by this same thing, basically the reversal of the yen carry trade. And one thing that's interesting, I know that, I mean, I think we both get the BCA research. Remember there's a chap there pointing out that basically the Mag 7 stocks had kind of moved in tangent way. I think it was basically the yen. Yeah. And so one of the big trades that Japanese investors, basically the Japanese money going overseas, a lot of that has been invested in MIC seven kind of big US stocks. So probably the US market is the place to kind of watch for any reaction because a lot of people are now saying, well, actually Japanese government bonds look good value now because the yields are much higher than they were. If you buy into them, particularly if you think the yen's going to appreciate, then actually probably not a bad place to buy JGBs. And so once that sort of happens, or enough people think it's going to happen, then yeah, you might see a whole lot of money sucked out of the US stock market and back in the Japanese government.

[Maris Amset Webb]

I mean, I think on your Mega seven point, I think it's worth noting that the NASDAQ is down on the year already. Yeah, yeah, down 1.2%. Yeah, quite a big fall yesterday. So. Yeah, maybe.

[John Stebig]

Well, yeah, well, I think it's interesting because people are getting sort of blame that or the story is that this is all because Trump is kind of saber rattling over Green line. So actually it's probably got more to do with the tectonic plates shifting because of the kind of what's happening in the bond market.

[Maris Amset Webb]

Exactly. I mean there is this conversation going on in Europe going, oh, we can retaliate because Europe has $8 trillion worth of US bonds and equities and we're going to divest and we're going to this and that. And there is a suggestion that this dynamic is already, which I suspect it isn't. Although we would expect a constant rebalancing away from the U.S. wouldn't we? If we look at last year and the US market hitting kind of 70% or 67 point something percent of the global index and I suspect that peaked at the end of last year.

[John Stebig]

Yes.

[Maris Amset Webb]

And the rebalancing will be fairly consistent for the next decade.

[John Stebig]

Definitely. I mean I think that's all this all helps with the rest of the world catch up story to the US which should have happened anyway because it's kind of crazy that so much global capital is in the US is way more than represents sensible diversification apart from anything else. So definitely, obviously Trump is a catalyst for that, but it's a move that has been on the cards for a long time and none of that is to defend Trump's specific actions or his specific style one way or the other.

[Maris Amset Webb]

Sorry, you don't have to do that. You know how everybody, every conversation we have at the moment with everybody, that anyone who says anything about anything to do with Trump, they have to preface it with saying, I'm not defending but exactly.

[John Stebig]

But you know, what's Greenland ever done for us? Yeah, exactly. So I think that's one thing we can actually quite comfortably say on Wednesday before Trump stands up. Has been a big driver and probably will continue to be a big driver, not just this week.

[Michael McDermott]

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[John Stebig]

And then there's gold.

[Maris Amset Webb]

Yeah, gold.

[John Stebig]

It's just kind of bonkers.

[Maris Amset Webb]

Silver, John.

[John Stebig]

Silver and silver. I mean don't even, don't even go in. I mean silver's like when sniffing distance to $100 an ounce now I never thought I would see that.

[Maris Amset Webb]

Do you remember how excited we were when it went through 50?

[John Stebig]

Yes.

[Maris Amset Webb]

We couldn't quite believe it when it went through 70 at what are we going to do when it goes to 100?

[John Stebig]

Why don't I own any is my main question. Yeah, John.

[Maris Amset Webb]

No bitcoin, no gold.

[John Stebig]

Oh, we've got gold. I've got some gold.

[Maris Amset Webb]

Okay.

[John Stebig]

Thank goodness.

[Maris Amset Webb]

Goodness.

[John Stebig]

I kind of talked about it all this time.

[Maris Amset Webb]

We have been talking about gold and silver for a long time. So I do hope that readers went and had a look at little look at their portfolio and of course now it's impossible to say what will happen next with gold and silver. Basement trademark geopolitics going nuts. All kinds of crazy things happening.

[John Stebig]

One thing and I texted you about this this morning Mark Carney gave a speech and Mark Carney is probably almost the epitome of Davos man amongst politicians, I think and he was saying essentially that okay everyone, forget it. The old rules based order is dead. And I do not know what nature of contrarian indicator that is but I feel that it represents a peak of something answers on the postcard for many listeners.

[Maris Amset Webb]

But it probably represents the, the final turning point for economies back inwards where they start re industrializing, start really focusing on energy security on security, on all these things that we've been talking about for ages and if you look at the investment implications of that, it just screams commodity super cycle.

[John Stebig]

Oh yeah it does. Because if everyone needs to build their own stockpiles up having run them down because we all bought into what we're now told was a Potemkin village of you know, kind of wind turbines and solar panels and everyone's lovey dovey to each other and anyone who objected to that was, was an idiot. But now it turns out they were right.

[Maris Amset Webb]

Trump's administration said at Davos yesterday, I think what is up with Europe wanting to hit net 0 by 2030 when they don't make any batteries.

[John Stebig]

Yeah.

[Maris Amset Webb]

So if you want that you're gonna need to build an awful lot of battery factories.

[John Stebig]

Yeah.

[Maris Amset Webb]

Or buy a lot of oil or.

[John Stebig]

By a lot of oil. Or buy coal.

[Maris Amset Webb]

Or buy coal.

[John Stebig]

Yeah. We still get plenty of coal in Britain.

[Maris Amset Webb]

Okay. This part of us are getting too old fashioned for comfort, John. All this, the idea of money flowing out of the US and rebalancing of assets around the world. It has got to be good for the UK, right? We're still what, the third largest stock market in the world? Still over 3% of global equities, market capitalization right here in London, biggest stock market in Europe, et cetera. And of course the FTSE 100 last year was the best performing asset, the fourth best performing asset globally in dollar terms. So if you're looking to move money out of the us, you might think to yourself, well, do you know the FTSE 100 doesn't look too bad, particularly given all those miners and all that old fashioned stuff that nobody ever wanted before they may now want. And the rally last year is very concentrated. A large part of the gains came from very few stocks. Lots of scope for that to broaden out, lots of scope for it even to drop down below the. So while obviously all markets are off this week so far, it does seem that is going to be rebalancing out of the US into other markets. The uk, while we are still saddled with a government that doesn't quite get it, may do reasonably well.

[John Stebig]

Yeah, I absolutely agree. I mean you're right. If you're going to diversify the biggest stock market, the first place you look is the next couple of ones down on the MSCI Global Tracker fund. And yeah, the UK is there and Japan's there basically. And interestingly, both of them have got relatively weak currencies compared to their history. So anyone who is an overseas investor can be looking at that and saying, well actually I may get a bump from the currency as well. So yeah, no, I think the UK market in general is probably in good shape for the year ahead.

[Maris Amset Webb]

Yeah, and I will say that we have a government that doesn't quite get it, but I think actually they are beginning to get it. There were some reforms announced at the beginning of this week to listing rules, etc. To make it easier for retail investors to participate in IPOs and secondary listings things so that, you know, there is movement here and actually, and I think.

[John Stebig]

It'S good, I mean there's stuff about kind of bonds being more open to retail investors as well. So from from that point of view I do think somebody gets it somewhere and the main reason they keep it quiet is because they know their core voter base is hugely suspicious of capitalism and anything that makes it easier. So, but, so those are good things. And yeah, I mean it's weird but yes, I think you can probably be quite upbeat on UK markets outlook for this year. Certainly.

[Maris Amset Webb]

Anything else we should add, keep a very close eye on Japan, keep an eye on Trump, watch Greenland, and pretty much everything that we have been talking about here for some time is coming to fruition. Not necessarily in the way that one would have liked.

[John Stebig]

Yeah, but at least it's good for the investments that we thought it would be good for.

[Maris Amset Webb]

That's true. Silver Linings John Silver Linings. Thanks for listening to this week's Marin Talks Money Debrief. If you like our show, rate, review and subscribe wherever you listen to podcasts. Also, be sure to follow me and John on X or Twitter erinagew and johnstepek. This episode was produced by Sam Asadi. Production support and sound design by Moses Andan. Questions and comments on this show and all our shows are all always welcome. Our show email is merriammoneyloomburg.net.