Yen Carry Trade Risks Approach Bitcoin as Investors Misjudge Japan's Bond Market Turmoil

Japan’s bond market is experiencing one of the most significant readjustments in its recent history, with potential implications that could extend beyond its borders and affect global assets like Bitcoin.

Key Takeaways

Historic Yield Increases: Japanese government bond yields have risen sharply, marking their highest levels in decades.
Liquidity Concerns: The tightening of liquidity in Japan raises alarms regarding the yen carry trade, which has been a crucial aspect of global investment strategies.
Impact on Bitcoin and Other Assets: As the yen carry trade unwinds, risk assets, including Bitcoin, may experience increased volatility.
Market Dynamics: Despite rising yields, Japan's real interest rates are still negative, complicating investment outlooks.

The surge in Japanese government bond yields points to critical changes in Japan's fiscal policies and market conditions. These developments may create ripple effects, influencing global risk assets, including cryptocurrencies.

Major Changes in Japan's Bond Market

The bond yields of Japanese government bonds (JGBs) have escalated since the beginning of 2026. The 10-year yield has reached approximately 2.12%, its highest since 1999, while the 30-year yield has hit an unprecedented nearly 3.5%.

This translates to increases of about 104 and 120 basis points for the respective yields, a significant adjustment after Japan's prolonged period of ultra-low rates. Investors are reacting to concerns over the country’s economic direction, fueled by a record budget approval of $780 billion for the fiscal year 2026, raising fears about growing deficits amidst rising inflation.

Widespread worries about the Bank of Japan's ability to control inflation due to persistent yen weakness are adding to the tension, prompting analysts from the Kobeissi Letter to label this bond market shake-up as one of Japan's most dramatic in history. Investors are grappling with losses as they reevaluate higher deficit forecasts against a backdrop of policy uncertainty.

For decades, the narrative around Japan's bond market centered on stability and central bank intervention, a norm now under questioning. Concurrently, true signs of liquidity contraction are surfacing. Market analyst Money Ape pointed out a concerning 4.9% drop in cash circulation in 2025, marking the first decline in nearly two decades.

Yen Carry Trade Unwinding: A Slow-Impact Risk to Crypto

This tightening trend raises concerns over the global yen carry trade, an essential part of international investment strategies for many years. Investors have historically borrowed in yen at low rates to invest in higher-yield opportunities across stocks, emerging markets, and cryptocurrencies.

As bond yields climb and funding conditions tighten, these trading positions become increasingly susceptible to forced liquidation. Market commentators at RadarHits have noted that the rise in the 30-year yield is directly pressuring the carry trade positions. They stated, “Japan’s 30-year yield rises to 3.5%, the highest level ever. Pressure building on the yen carry trade.”

If this unwinding accelerates, Bitcoin and other risk assets reliant on yen-based liquidity might encounter increased market volatility. Some analysts warn that the unfolding stress is developing slowly, a phenomenon described by JustDario as “boiling frog syndrome.” Here, gradual structural pressures could prevent investors from responding until market instability becomes apparent.

In the view of analysts, the underlying financial system supporting the massive global JPY carry trade is deteriorating in real-time, albeit at a measured pace, potentially leading to a financial crisis.

Despite these rising nominal rates, Japan's real interest rates remain in negative territory, which continues to support secrecy in liquidity and risk appetites. Analysts at Capital Flows have pointed out that this situation explains the resilience of Japanese equities near historical highs and the consistent influx of capital into Japan's markets.

“This means there is a TON of liquidity in their market. You think the Fed is accommodative? It’s nothing compared to BoJ,” the analyst highlighted.

This paradox of tightening signals alongside negative real interest rates complicates the situation further. The concern is not merely about facing an immediate shock but whether the prolonged unwinding of the carry trades could discreetly eliminate a critical source of global liquidity.

As of early January 2026, Japanese yields remain volatile, and the future largely hinges on whether the Bank of Japan can orchestrate a soft landing, or if the strain in the bond market will trigger broader financial disturbances, impacting Bitcoin's macro environment just as much as Japan's economic outlook in the coming months.