The turmoil in Japan's bond market is evolving into a systemic risk for global investors, with Wednesday's 40-year Japanese Government Bond (JGB) auction in Tokyo time becoming a critical test. The loose fiscal policy proposed by Sanae Takaichi this month has triggered violent fluctuations in the yen and Japanese bonds. The yield on 40-year JGBs briefly surged above 4% last week, a once-unimaginable level that underscores investor concerns about Japan's debt sustainability. The yen's exchange rate against the dollar recently fell to near 160, sparking market speculation that Japan's Ministry of Finance may have intervened. The yen has rebounded by as much as 2% this week, but analysts warn that mere currency intervention has limited effect. Kamakshya Trivedi, Chief FX and EM Strategist at Goldman Sachs, pointed out that a more successful approach would be for the Bank of Japan to accelerate the pace of interest rate hikes. The impact of this turmoil is spilling over. Japan is one of the largest foreign sovereign investors in U.S. Treasuries, holding $275 billion in agency mortgage-backed securities. If JGB yields rise further, it could prompt Japanese investors to repatriate overseas funds, thereby pushing up bond yields in the United States and Europe, regardless of whether the Federal Reserve continues to cut rates. The fiscal stimulus plan has ignited the bond market. Since taking office in October last year, Sanae Takaichi has proposed cutting the food sales tax to stimulate the economy, but this plan has sparked market panic against the backdrop of Japan's already heavy debt burden. According to International Monetary Fund data, Japan's total debt-to-GDP ratio is as high as 237%, the highest in the world. Since Takaichi took office, the yield on 40-year JGBs has accumulated an increase of 51 basis points. Bond investors are typically wary of policies that signal an increasing debt burden, especially for governments already deeply mired in debt. Robin J. Brooks, a senior fellow at the Brookings Institution, wrote on Substack last month that the standard policy prescription for countries with excessive debt is to cut spending and raise taxes, not the opposite. Yen volatility is gripping global nerves. David Rosenberg, founder of Rosenberg Research, said early Tuesday that the yen is approaching a potential breaking point, having currently tested the 100-day trendline near 154 yen. He emphasized, "What happens in Japan will not stay in Japan; global bond markets and currencies are watching this tug-of-war." The yen's movement directly affects multiple interests. A stronger yen would make U.S. goods more price-competitive in Japan, helping the Trump administration reduce the trade deficit. Domestically in Japan, however, a stronger yen would cut into the profits of export-oriented companies like Toyota Motor and Nintendo, potentially reversing the Nikkei index's nearly 6% gain so far this year. Mohit Kumar, Chief Economist at Jefferies, expects the yen to recover to a level below 150 against the U.S. dollar. Wednesday's auction is a critical test. Although 40-year bond prices have recovered somewhat since last week, Wednesday's auction will be a major test. Weak demand could trigger a new wave of selling. BTIG noted in a research report on Tuesday that Japan is currently the largest foreign sovereign investor in agency mortgage-backed securities, holding $275 billion, with net purchases of $10 billion last year alone. Kumar warned, "Any further selling of JGBs will cause Japanese investors to shift their focus from U.S. Treasuries and European bonds back to the domestic market." This could push U.S. government bond yields higher, regardless of the Federal Reserve's monetary policy direction. This is precisely why the turmoil in Japan's bond market is so critical for U.S. and European investors—the potential repatriation of funds could trigger ripple effects worldwide.