Tension in the Japanese bond market intensified on Monday. The yield on 10-year bonds rose to 2.825%—the highest since October 1996.
At first glance, this seems like a local story about Japan’s debt market. But the problem is broader: for many years, a cheap yen helped investors fuel the growth of stocks and Bitcoin (BTC).
Now this scheme is starting to crack. The yen is trading around 162 per dollar—the weakest level since 1986. Even record currency interventions by Tokyo this spring failed to support the rate for long.
Yield on 10-year Japanese bonds. Source: TradingView
Japan’s bond market has faced increased supply and fewer buyers
Prime Minister Sanae Takaichi’s government plans to direct more than ¥370 trillion, or about $2.3 trillion, in public and private investment into 17 strategic sectors by the 2040 fiscal year. For the market, this means one thing: even more government debt issuance may be ahead.
Meanwhile, the Bank of Japan is gradually leaving the market. The regulator continues to reduce the volume of bond purchases. According to Reuters, a pause in this process is only possible from the 2027 fiscal year. Until then, the largest buyer of Japanese debt will support the market less and less.
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Demand from other investors also looks unconvincing. Before the yield spike on Monday, Japan had a weak auction for 10-year bonds. Later this month, the country will also hold auctions for 20-year and 40-year bonds.
The problem is that Japan’s government debt already exceeds 200% of GDP. Therefore, a sharp rise in borrowing costs is becoming increasingly painful for the country.
“Less demand at auctions, more supply, and weak support from the Bank of Japan—in such a situation, yields are rising almost mechanically, not just because of investor sentiment,” noted Bull Theory macro analyst.
The Unwinding of Carry Trade Could Hit Bitcoin and Stocks
For many years, investors borrowed cheap yen and invested that money in U.S. stocks, government bonds, and cryptocurrencies. As long as rates in Japan were low, the scheme worked: money was cheap, and yields in other countries were higher.
But now everything is changing. Rising Japanese bond yields make such loans more expensive. And if it becomes more profitable for capital to return to Japan, investors have to close positions. That means selling the very assets previously bought with borrowed yen.
The market has already seen this scenario quite recently. In July 2024, an unexpected rate hike by the Bank of Japan triggered a wave of carry trade unwinding. The Bank for International Settlements later analyzed this episode separately.
The consequences were sharp. On August 5, 2024, the Nikkei index plunged by 12.4%—the worst trading day since 1987. Bitcoin was also sold off and briefly fell below $50,000.
Nikkei performance in August 2024. Source: TradingView
Now positions once again look overheated. According to LSEG, the volume of bets against the yen has risen to nearly $11.3 billion. This is the highest since July 2024.
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Meanwhile, Japanese authorities have fewer and fewer tools left. The Ministry of Finance reported that from April 28 to May 27, it spent a record ¥11.73 trillion, or $73.6 billion, on buying yen.
But the effect quickly faded. The yen lost all its gains after the interventions and returned to nearly four-decade lows.
JPY/USD exchange rate dynamics. Source: TradingView
The Bank of Japan’s rate hike to 1% on June 16 also changed almost nothing. This was the highest level in 31 years, but the market still did not see a major reversal for the yen.
After this, Goldman Sachs downgraded its forecast for the Japanese currency. The bank believes the rate could reach 165 yen per dollar within a year. Against this backdrop, analysts are increasingly calling further Bank of Japan rate hikes a direct risk for Bitcoin.
At the time of publication, BTC was trading around $63,676, up 3% in 24 hours. But vulnerability remains. The same applies to the stock market, especially after the record growth of the Nikkei in June.
Now investors will be watching the auction for 30-year Japanese bonds and new signals from the Bank of Japan. If the market adjusts gradually, a major shock may not occur. But if carry trades start to unwind abruptly, volatility will quickly spill over into both stocks and cryptocurrencies.
