Japan's Bond Yield Surge and the Risks to Tether's $113B Treasury Exposure

Japan's 10-year government bond yield surged to 1.930% in December 2025, an 18-year high, as the Bank of Japan (BOJ) continues its long-awaited normalization of monetary policy. This shift, driven by persistent inflation and a weaker yen, has triggered a cascade of global liquidity concerns. For Tether, the stablecoin giant with over $113 billion in U.S. Treasury holdings, the implications are stark: a potential sell-off by Japan-the largest foreign holder of U.S. Treasuries at $1.189 trillion-could destabilize its peg to the dollar and ignite broader market volatility according to analysts.

The BOJ's Policy Dilemma and Rising Yields

The BOJ abandoned its yield curve control program in March 2024, allowing JGB yields to rise freely according to reports. By December 2025, the central bank is expected to raise its policy rate to 0.75% from 0.5%, marking its first hike since January 2025. This tightening reflects a broader recalibration of Japan's monetary stance, as Prime Minister Sanae Takaichi's expansive fiscal policies and a weakening yen push inflation toward the BOJ's 2% target. However, the rapid rise in long-term yields-20-year and 30-year JGBs hit 2.936% and 3.436%, respectively-has raised alarms about Japan's $230% debt-to-GDP ratio and the risk of a carry trade unwinding.

Tether's $113B Exposure and Liquidity Risks

Tether's reserves are heavily concentrated in U.S. Treasuries, with over 80% of its $127 billion in assets tied to government debt. This exposure makes it uniquely vulnerable to shifts in global bond markets. Japan's $1.189 trillion in U.S. Treasury holdings-nearly 10% of the total foreign-held U.S. debt-represents a wildcard. If rising JGB yields incentivize Japan to reallocate capital back into domestic bonds, a large-scale selloff of U.S. Treasuries could trigger a liquidity crunch for Tether according to market analysis.

The risk is compounded by Tether's recent diversification into higher-risk assets. S&P Global Ratings downgraded its stability assessment to "weak," citing the inclusion of Bitcoin, gold, and secured loans in its reserves. While Tether's Q3 2025 profits remain robust, the agency warned that its redemption capacity could strain under volatility, particularly if Treasury markets tighten according to financial reports.

Carry Trade Unwinding and Global Liquidity Shifts

The unwinding of the yen carry trade-a strategy where investors borrowed yen at ultra-low rates to invest in higher-yielding global assets-has already tightened liquidity. In October 2025, over $640 million in crypto positions were liquidated as markets reacted to rising JGB yields. Bitcoin and Ethereum dropped over 5% in a single day, illustrating the fragility of risk assets in a tightening environment according to market data.

Japan's strategic shift toward U.S. Treasuries in Q3 2025-its highest holdings since 2022-suggests a temporary pause in sell-offs according to financial reports. However, analysts warn that a reversal could trigger a repricing of global assets, forcing stablecoins like Tether to reevaluate their liquidity strategies according to market analysis. The BOJ's cautious approach to rate hikes, with a projected 0.75% terminal rate by mid-2026, adds uncertainty.

Depeg Risk Cascades and Systemic Implications

A depeg scenario for Tether would ripple through crypto and traditional markets. S&P's downgrade has already reignited fears of a depeg, with critics pointing to Tether's limited transparency around custodians and reserve management. While historical resilience and profit buffers reduce immediate risks, the convergence of Japan's yield surge, S&P's downgrade, and global liquidity shifts creates a "perfect storm" for systemic stress according to financial analysts.

For now, Japan's Treasury holdings remain stable, and the BOJ's data-dependent approach suggests gradual normalization according to market data. Yet the interplay between rising yields, carry trade dynamics, and stablecoin mechanics underscores a fragile equilibrium. Investors must monitor Japan's fiscal policy, the BOJ's rate path, and Tether's reserve disclosures for early warning signs of a depeg cascade.