Tokyo has told Washington that proposed US bank reforms could force some Japanese financial institutions to pull out of Wall Street, in an unusually blunt letter to US regulators released Thursday.
Japan said the so-called "Volcker Rule", which is due to be implemented in July, also threatens to have adverse consequences on government bond markets worldwide at what it called a "critical juncture".
The US reforms, named after the former chairman of the US Federal Reserve, will limit trading by banks in financial instruments on their own account, deals which are widely held to have contributed to the global financial crisis.
But the Bank of Japan and the government's financial regulator wrote to authorities in Washington urging them not to apply the rules to non-US firms, and calling for trading in Japanese government bonds (JGBs) to be exempt.
As they stand, the rules "would raise the operational and transactional costs of trading in JGBs and could lead to the exit from Tokyo of Japanese subsidiaries of US banks", the letter said.
"Some of the Japanese banks might be forced to cease or dramatically reduce their US operations," it added.
The document warned that the regulations threatened the "liquidity and pricing" of Japanese and other non-US government bonds at a crucial time for global debt markets.
It did not specifically refer to the eurozone sovereign debt crisis, but went on: "We are concerned that such developments could occur on a global scale.
"This might exert extremely negative pressures on sovereign bond markets worldwide through reduced liquidity and a rise in volatility."
Japan has the highest debt burden of any advanced economy at around 200 percent of gross domestic product.
The letter was sent on December 28 but only released on the BoJ's website on Thursday, as US Treasury Secretary Timothy Geithner visited Tokyo.
No explanation was immediately available for the delay, but an official said Finance Minister Jun Azumi raised the issue in his discussions.
The document was unusually strongly worded for a diplomatic communication, and urged Washington to consult more widely and internationally on the issue.
The strong tone was "a bit of a surprise," Mizuho Securities chief market economist Yasunari Ueno told Dow Jones Newswires, adding Tokyo appeared concerned that a decline in liquidity could make the JGB market more volatile.