SPX vs US–Japan Spread: Liquidity Signal

The S&P 500 (SPX) index and the US 2-year minus Japan 2-year government bond yield spread have moved broadly in tandem since 2015 when the spread is shifted forward by roughly three years. Periods when this forward-shifted spread surged and then fell sharply have lined up with significant SPX peaks, creating a visually consistent pattern across recent cycles.

A major element behind the latest collapse in the US02Y–JP02Y spread from 2022 into 2023 is policy convergence. The Federal Reserve moved from aggressive tightening toward an eventual easing path as US inflation moderated, while the Bank of Japan began cautiously normalizing from ultra-loose settings. This combination sharply compressed the short-term rate advantage of US assets over Japanese assets.

A wide positive spread historically encourages investors to borrow in low-yielding yen and allocate into higher-yielding US assets, supporting dollar strength and risk-taking. When the spread narrows, the reward for this strategy shrinks, potentially reducing one channel of liquidity into US markets even if equities can diverge for extended periods. The current environment therefore features a strong past SPX advance alongside an already sharply lower US–Japan 2-year differential.

The suggested three-year lead of the spread relative to SPX tops is an interpretive macro pattern rather than a statistically validated rule. The alignment relies on a limited sample of post-2015 cycles and may partly reflect overlapping global tightening phases. As a result, the recent sharp decline in the spread is best viewed as signaling a shift in the broader rate and liquidity regime, while any specific timing implications for future SPX peaks remain low-confidence and illustrative.