Japan’s Rising Bond Yields Are About to Shake the Global Carry Trade—and Crypto Markets

Tokyo's monetary pivot is sending shockwaves through the world's favorite funding currency. The Bank of Japan's long-telegraphed exit from negative rates is finally gaining momentum, pushing government bond yields higher. That shift threatens to unwind one of finance's most crowded and lucrative trades.

The Carry Trade Unwinds

For years, traders borrowed cheap yen to fund investments in higher-yielding assets abroad. It was a one-way bet, a free-lunch strategy propped up by Japan's ultra-loose policy. Now, as the yield gap narrows, that trade is getting squeezed. Capital is starting to flow the other way, seeking safer harbor.

Liquidity's New Flight Path

Global markets feast on liquidity. The carry trade was a primary pump, flooding the system with cheap capital that found its way into everything from emerging-market debt to tech stocks. Crypto, with its high-beta nature, drank deeply from that well. A stronger yen and rising funding costs don't just trim margins—they can trigger a wholesale rush for the exits.

Digital Assets in the Crosshairs

Volatility loves company. When traditional risk assets shudder, crypto rarely gets a pass. A broad deleveraging event forces liquidations across the board. The speculative capital that powered the last bull run? Much of it was printed in Tokyo. Its retreat creates a stark new reality: a world with less free money sloshing around.

Finance's cynical truth remains—the most predictable trades are the ones central banks eventually break. Japan's move isn't a market shock; it's a scheduled demolition. The only question is what gets caught in the rubble.

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.

JUST IN:Japan 20-Year Government Bond (JGB) yield jumps 5.5 bps to 2.88%, marking the highest level since June 1999. pic.twitter.com/a9iDbCcBBo

— Whale Insider (@WhaleInsider) December 1, 2025

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.

Pressure on Japanese government bonds is surging:

Open interest in the front month of Japan’s 10Y government bond futures just hit 188,000 contracts, the highest since September 2024.

The number of outstanding futures contracts that are still active has surged +65,000 since… pic.twitter.com/FM0b9AYOVh

— The Kobeissi Letter (@KobeissiLetter) November 30, 2025

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.