Markets tend to only focus on one or two major themes at a time.
The biggest takeaway from S&P's surprise downgrade of Japan's long-term sovereign debt rating to AA-minus may be the speed at which the bond vigilantes could switch their focus away from Europe—where it's been for one year—to Japan or the UK or the United States.
The yen has dropped around the world. But, truth be told, this is one event world markets are shrugging off. The yen is near 15-year highs: Tokyo even intervened itself in an attempt to weaken it last year, so Japan's exporters are probably smiling today.
Make no mistake, with Japan's government forecasting its debt will rise to twice its GDP this year, the situation is grave—a "fiscal dead end" was how Tokyo's Economy Minister recently described it. This may strengthen Kaoru Yosano's hand to, say, raise the national sales tax above 5 percent.
But traders point out that the vast majority of Japan's sovereign debt pool, likely to reach a staggering $10.5 trillion this year, is owned by domestic investors. Foreigners only hold around 5 percent of Japanese government bonds.
So there's very little opportunity for mass liquidation or short selling that might drive yields to potentially unsustainable levels, as happened in Europe. We'll see how Tokyo's stock market opens to the news tonight but yields on 10-year JGBs appear to have barely moved.