Seeking a new 'safe haven': In the post-turmoil era, where is global capital flowing?

On January 20, 2026 local time, Wall Street experienced severe volatility in bonds, stocks, and currencies: the three major US stock indexes plummeted across the board,$Nasdaq Composite Index (.IXIC.US)$ with both the Nasdaq Composite Index (IXIC.US) and the S&P 500 Index (SPX.US) falling by more than 2%. The relatively resilient blue-chip index, the Dow Jones Industrial Average (DJI.US), also recorded its largest single-day drop in three months.

Leading the declines were previously favored AI giants, $Oracle (ORCL.US)$ with NVIDIA (NVDA.US) plunging nearly 6% and Broadcom (AVGO.US) dropping 5.43%. All of the 'Magnificent Seven' fell, $NVIDIA (NVDA.US)$And$Tesla (TSLA.US)$ with declines exceeding 4% for each. Apple (AAPL.US) and Amazon (AMZN.US) dropped more than 3.4%, Meta (META.US) and Google-C (GOOG.US) fell over 2%, and Microsoft (MSFT.US) declined more than 1%.

The US Dollar Index, which had been at 99.137 earlier in the day, once fell below 98.377, with a drop of 7.7%, and is currently still hovering around the 98.51 level.

The yields on 10-year and 30-year US Treasury bonds surged to 4.29% and 4.91%, respectively. Bond prices, which move inversely to yields, fell, reflecting capital outflows.

On the other hand, gold prices hit new highs, with gold futures breaking through the $4,800 per ounce level, currently trading at $4,846.6 per ounce, getting closer to $5,000.

The superficial trigger for this turmoil was Trump's statement about Greenland, but the real 'eye of the storm' might be far away in Japan across the Pacific. Trump’s tough stance provided the perfect 'divine assist' for the storm, accelerating the restructuring of global capital flows.

Aggressive fiscal policies from Tokyo spark 'Japanese bond storm'

Japanese Prime Minister Sanae Takachi formally announced the dissolution of the House of Representatives for an election on January 19 and made 'phased adjustment of consumption tax' a core campaign promise. The proposal to 'reduce the consumption tax on food to zero for two years' directly ignited market fears over the deterioration of Japan's fiscal situation.

Meanwhile, the newly formed opposition party alliance 'Centrist Reform United' also proposed the 'zero consumption tax on food,' which suggests that regardless of the election outcome, Japan’s fiscal expansion trend seems irreversible, shaking market confidence in its debt sustainability.

Japan’s fiscal fundamentals were already fragile. Data from debtclock.io shows that Japan’s public debt has reached 251.74% of GDP, the highest among developed economies. As of January 21, 2026, its public debt is projected to reach 1,534 trillion yen, while the approved budget for the fiscal year starting April 2026 amounts to 122.31 trillion yen, approximately 780 billion US dollars.

The reduction in consumption tax on food is expected to reduce government revenue by 5 trillion yen annually. Combined with Sanae Takachi’s consistently pursued expansionary fiscal policies and plans to increase defense spending, Japan’s fiscal deficit will further deteriorate. Based on Japan’s debt size, we estimate that for every 100 basis point (i.e., 1%) rise in Japanese government bond yields, interest expenses could increase by at least 15.34 trillion yen, equivalent to 12.5% of its new fiscal budget, not including additional debt. This has directly triggered a sell-off in the government bond market.

On January 20, the yield on Japan’s 40-year government bonds surged 27 basis points to 4.215%, the highest level since the issuance of this maturity in 2007. The yield on Japan’s 10-year government bonds also climbed 7.3 basis points to 2.33%, more than doubling within a year, as shown in the chart below.

Transmission chain: Unwinding of arbitrage trades and amplification of losses due to spillover risks from the US and Europe.

The sharp turbulence in Japan’s bond market quickly spread to global markets through the unwinding of yen carry trades, becoming a significant factor pressuring US stocks, bonds, and the currency.

Before and after the 2008 financial crisis, prolonged low interest rates in major developed countries due to accommodative policies and subsequent quantitative easing by central banks in Europe and the US fueled the rapid expansion of the 'shadow banking' system. These funds were supported by 'safe assets,' including government bonds of developed countries, especially US Treasuries, collateralized bonds, and credit-enhanced loans (such as securities issued by Fannie Mae and Freddie Mac, which are considered to have US government backing), forming a massive offshore dollar pool, the scale of which may be too large even for the Federal Reserve to determine precisely.

These funds circulate in global capital markets in various forms to generate excess returns. While the Federal Reserve’s interest rate policy can only directly or indirectly influence a small portion of this vast pool of funds, changes in political, economic, and trade policies of various countries may profoundly impact asset prices and returns, thus affecting their flow.

The exchange rate and interest rate dynamics between the yen and the dollar should be one of the larger influencing factors.

Due to Japan's long-term low interest rates, the scale of yen carry trades has been substantial. Investors borrow yen at low interest rates to invest in high-yield assets, with these yen typically using the yield on long-term Japanese government bonds as the benchmark.

Carry trades generally require 'safe assets' (assets with low credit risk and high liquidity, such as US Treasuries) as collateral. If margin requirements are not met or traders fail to fulfill their obligations, intermediaries can sell these collateral assets to cover losses.

Therefore, when yields on Japanese bonds surge, it raises the cost of yen funding, narrowing the arbitrage space for carry traders, triggering large-scale unwinding - investors close overseas positions and buy back yen, leading to a global selloff in risk assets, with US stocks and bonds being hit first. On the other hand, intermediaries selling collateral assets to offset losses further intensifies price volatility, causing a domino effect, which explains why asset price declines tend to be faster than increases.

The underlying fiscal and policy concerns in the US market act as an amplifier for volatility.

The issue of the US fiscal deficit continues to escalate. According to Bloomberg, the US fiscal deficit for 2025 may reach $1.67 trillion, including tariff revenues from Trump. It appears lower compared to October 2025 projections and data from the past two years. However, whether US tariff revenue can be sustained remains highly uncertain. On one hand, higher courts might rule that Trump's tariffs are illegal; on the other hand, Trump's tough stance on Greenland and tariffs could provoke European backlash, triggering countermeasures that weaken the export advantages and interests of US companies, forcing Trump TACO (Trump Always Chickens Out).

Adding to this, Trump’s 'bigger is better' policies are expected to further expand the US fiscal deficit over the next decade. To manage debt repayment pressures, the US will need to issue more Treasury bonds. Meanwhile, major holders of US Treasuries have been reducing their positions recently, raising market concerns about an oversupply of US debt.

On January 20, long-end US Treasury yields surged in tandem with Japanese bonds, with the 10-year US Treasury yield rising nearly 6 basis points to 4.285%, nearing its highest level since August, reflecting capital outflows from the bond market (bond prices move inversely to yields).

Meanwhile, the high-risk, high-reward tech sector also faced significant selling pressure. The Nasdaq led the decline that day, possibly reflecting funds exiting highly valued tech stocks.

Additionally, the Trump administration's controversy regarding Greenland has intensified geopolitical friction between Europe and the US, further shaking market confidence. Trump’s remarks have drawn criticism from multiple European countries. Coupled with the US's persistent fiscal deficit and policy uncertainties, trust in US assets within European markets has declined, fueling expectations of Europe accelerating economic decoupling from the US. Such decoupling expectations not only weaken the US dollar index but also potentially trigger a global repricing of dollar assets, amplifying declines across US 'stocks, bonds, and currency.'

Denmark’s Akademiker Pension announced the liquidation of its US Treasury holdings, citing concerns about US fiscal issues as the primary reason, while the Greenland issue provided the final motivation. This may prompt more European sovereign funds to further reduce or liquidate their US assets due to fears about Trump’s policies, exacerbating asset price volatility.

Market Outlook: Asset Prices Stabilize, but Risks Remain

During the Asian trading session on January 21, 2026, the surge in yields for Japanese and US bonds eased, with bond prices stabilizing.

We also noticed a rebound in major US stock index futures. Nasdaq 100 futures and S&P 500 futures both rose over 0.33%, while Dow Jones futures gained 0.16%. NVIDIA and Tesla, which plummeted the previous day, edged up 0.65% and 0.21% respectively in after-hours trading. Gold prices retreated from above $4,880 to $4,833.

However, in the short term, volatility risks in global financial markets have yet to dissipate, with core issues centered around Japan's bond troubles and policy uncertainty in Europe and the US.

In Japan, although the market anticipates that the Bank of Japan may resume bond purchases or slow down the pace of monetary policy normalization to calm the market, Sanae Takichi’s determination to push fiscal expansion for election purposes is clear, making it difficult to reverse worsening fiscal conditions. Japanese bond yields still have room to rise, and the potential unwinding of yen carry trades will continue to disrupt global liquidity.

The US market faces dual pressures: first, policy uncertainty as Trump's fluctuating policies (TACO signals) could exacerbate market swings; second, adjustment pressure remains on large US tech stocks. If earlier high investments in AI do not yield expected returns, it could trigger a pullback in these highly valued tech stocks.

Moreover, the decoupling process between Europe and the US might accelerate, becoming a significant variable reshaping the global asset landscape. Heightened European vigilance towards US policy uncertainty and potential threats may drive efforts toward self-reliance in trade and finance, reducing reliance on dollar-denominated assets.

Against this backdrop, global capital may urgently seek alternative markets characterized by policy stability, reasonable valuations, and some distance from current Western tensions. Undervalued and policy-stable Chinese assets could emerge as a new option for risk aversion and allocation—shielded from direct impacts of Japan's fiscal crisis and geopolitical frictions in Europe and the US, while possessing room for valuation recovery, offering clear advantages in the global asset realignment.

Conclusion

This market upheaval, triggered by Japan’s fiscal storm, transmitted through global arbitrage trading chains, and amplified by US policy uncertainty, clearly reveals a reality: In an era of high global debt, high volatility, and intensifying geopolitical rivalry, the 'butterfly effect' of localized risks is being infinitely magnified. Japan’s unsustainable fiscal path, the wavering credibility of European and American policies, and the long-accumulated pressure on asset valuations together form a fragile triangle ready to collapse at any moment.

Despite technical rebounds following sharp market fluctuations, the root causes of the storm remain unresolved. Japan’s political decisions have pushed its finances to a critical point, with every rise in Japanese bond yields squeezing global liquidity levels. Meanwhile, the attractiveness of US assets under growing fiscal deficits and inconsistent policies is facing a genuine test of trust. Global capital will inevitably reassess the definitions of 'safety' and 'return,' accelerating the reconfiguration of fund flows.

Against this backdrop, markets with policy continuity, valuation advantages, and a certain distance from major risk centers are more likely to become 'stabilizers' amid turbulence. This dramatic reshuffling of the global capital landscape might just mark the beginning of a new round of value discovery.

Author: Wu Yan

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