Japan’s Rising Bond Yields Threaten Global Carry Trade and Crypto Markets

TLDR

• Japan’s 10-year government bond yields reached 1.86% on Monday, the highest level since April 2008
• The yield increase threatens the yen carry trade, where investors borrowed cheap Japanese yen to invest in higher-risk assets like crypto
• Japan holds about $1.1 trillion in US Treasury securities, the largest foreign position
• BOJ Governor Kazuo Ueda said the central bank will make an “appropriate decision” on rate hikes at its December 18-19 meeting
• Crypto markets sold off on Sunday, with analysts linking the decline to changing Japanese monetary policy

Japan’s government bond market experienced a sharp move on Monday as 10-year yields climbed to 1.86%. This marks the highest level since April 2008.

The yield increase comes as the Bank of Japan signals potential interest rate changes. BOJ Governor Kazuo Ueda stated the central bank will make an “appropriate decision” on rate hikes at its December 18-19 policy meeting.

Japan’s bond yields have nearly doubled over the past year. Two-year bond yields also reached 1% for the first time since 2008.

While 1.86% remains relatively low by global standards, the move represents a major shift. Japan has maintained a low interest rate environment for decades, with rates near or below zero for most of that period.

The low rate environment enabled the yen carry trade. Investors worldwide borrowed Japanese yen at low interest rates to purchase higher-yielding assets.

Economics author Shanaka Anslem Perera explained that trillions were borrowed in yen and deployed into US Treasurys, European bonds, and risk assets globally. He warned that this anchor is now breaking.

Impact on US Treasury Markets

Japanese institutions hold approximately $1.1 trillion in US Treasury securities. This represents the largest foreign position in US government debt.

Perera noted that when domestic yields rise from near zero to almost 2%, the incentive to invest abroad changes. Capital that flowed outward for decades now faces pressure to return to Japan.

The timing creates challenges for US markets. The Federal Reserve recently ended quantitative tightening while the US Treasury needs to issue record amounts of debt to finance $1.8 trillion deficits.

Crypto Market Response

Cryptocurrency markets experienced a sell-off on Sunday. Some analysts linked the decline to the changing Japanese monetary policy landscape.

Bitcoin and other cryptocurrencies have historically performed well during periods of loose monetary policy and low global interest rates. The yen carry trade provided cheap capital that flowed into various risk assets.

DeFi analyst Wukong stated that crypto sits at the highest end of the risk spectrum. Even small shifts in liquidity can lead to sharp price movements in digital assets.

When carry trade capital reverses and flows back to Japan, less speculative capital becomes available for crypto markets. Investors typically move toward safer assets during periods of market repricing.

Japanese stocks also declined on Monday, with the Nikkei 225 average falling 950.63 points or 1.89% to close at 49,303.28. The yen strengthened to 155.59-61 per dollar at 3 p.m., compared to 156.28-31 on Friday.

Ueda told a press conference that delaying rate hikes would spur inflation and cause confusion.

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