The Bank of Japan has sounded the alarm: Japanese bond market is critical for the global economy! Hedge fund liquidation may trigger a "liquidity storm" in global stocks and bonds.

The Bank of Japan warned in a recent report that the potential liquidation behavior of global hedge funds could quickly spread to the Japanese government bond market. The wording of the Bank of Japan's latest warning also implies that the Japanese bond market is no longer a "local market issue," but rather a key transmission point in the global liquidity chain. Once global risk events trigger these funds to deleverage or close positions, the next wave of impact is likely to be not localized volatility in the Japanese market, but rather synchronized severe sell-offs in global stock and bond markets. In its semi-annual Financial System Report released on Tuesday, the Bank of Japan stated that "the presence of foreign hedge funds in the Japanese bond market has been increasing." "It is necessary to closely monitor the possibility that if foreign hedge funds close positions on a global scale during pressure events, the impact may spread to the Japanese and global bond markets through channels such as a sudden drop in market liquidity." According to analysis of data from the Japan Securities Dealers Association, foreign investors accounted for approximately 60% of the trading volume in Japanese government bonds last month. In the Japanese government bond futures market, their dominance is even more pronounced, accounting for 78% of trading volume in March. As shown in the above figure, global leverage hedge funds are increasingly dominating the Japanese government bond market - the proportion of foreign investors in Japanese government bond trading (3-month rolling average). The Bank of Japan stated that the scale of arbitrage trading by foreign hedge funds seems to have expanded, which may increase the risk of overseas shocks having a greater impact on the Japanese and global financial markets. The report also pointed out the need to monitor the trends of directional hedge funds, as significant adjustments in the prices of risk assets such as popular global tech stocks closely related to AI, or further escalation of Middle East geopolitical conflicts, pose significant risks of major sell-offs. In January of this year when the Japanese bond market experienced a sharp drop, the yield on 10-year Japanese government bonds surged nearly 20 basis points within two days, leading Wall Street analysts to point out that this selling pressure dragged the global stock and bond markets into a "more difficult to explain debt and interest rate story." Furthermore, coupled with recent warnings from the IMF that Middle East wars leading to rising oil prices and inflation are tightening global financial conditions, posing ongoing pressure on non-bank institutions, private credit, and AI-related borrowers. The IMF emphasized that Middle East geopolitical conflicts have pushed up global sovereign bond yields and may trigger large-scale forced sales of leveraged hedge fund assets. Therefore, the Bank of Japan's latest warning essentially reminds the market that if the yield chain of Japanese government bonds is trampled by leveraged funds again, the next wave of impact is likely not localized volatility, but synchronized severe sell-offs in global stock and bond markets. Therefore, if liquidity in the Japanese government bond market suddenly deteriorates, the global bond and stock markets will face not just a normal level of risk aversion, but a triple resonance of "significant yield increases + deleveraging + growth stock valuation compression." Especially for global stock markets, the large-scale sell-off by foreign hedge funds of Japanese government bond assets is a risk asset valuation mechanism that is transmitted through the yield curve and liquidity crisis. When hedge funds are forced to liquidate on a large scale in Japan or globally, the assets that are often the first to be hurt are not profit expectations themselves, but those assets that are high valuation, high duration, and rely on loose financing environments in the backdrop of sharply rising bond yields - namely, tech growth stocks, especially popular tech stocks closely related to AI and other sectors where risk sentiment is most concentrated. The Bank of Japan even directly mentioned the need to monitor directional hedge funds, as price adjustments in AI-related stocks or escalating Iran conflicts could serve as triggers.