Japan’s bond market is signaling that the country’s era of near-free funding is ending, with 30-year government bond yields reaching 4.185% and 10-year yields climbing to 2.945% ahead of the Bank of Japan’s Sept. 17–18 policy meeting. The move places renewed pressure on yen-funded carry trades that have supplied cheap leverage to global markets, including cryptocurrency.
Bitcoin has remained above $80,000 for the first time since May despite the jump in Japanese borrowing costs, rising 22% over the past week. That resilience contrasts with the sharp selloff seen during the August 2024 unwind in yen-funded positions, when Bitcoin fell from roughly $64,600 to $49,000 by Aug. 5 and Japan’s TOPIX index lost 12% in a single session.
Markets are pricing in another Bank of Japan rate increase after the central bank lifted its policy rate to 1.0% in June, its highest level in 31 years. A move to 1.25% would further raise the cost of borrowing yen and test the economics of trades built around selling the Japanese currency to purchase higher-yielding assets elsewhere.
Long-dated Japanese yields reach levels last seen in 1996
The rise in long-term Japanese government bond yields reflects a more difficult environment for both Tokyo and global traders. Japan’s 30-year yield at 4.185% and 10-year yield at 2.945% mark levels not seen since 1996, according to the market figures provided.
For decades, Japanese interest rates helped support a common strategy across global markets: borrow yen cheaply, convert the proceeds into dollars or other currencies, and buy assets offering higher expected returns. Those assets can include U.S. bonds, equities, credit instruments and cryptocurrencies.
The Bank for International Settlements has put offshore yen loans to non-bank borrowers at about $250 billion. Estimates of the broader yen carry trade have reached as high as $500 billion, though its scale is difficult to measure because positions can be held through derivatives, funds and cross-border financing arrangements.
A rise in Japanese rates does not automatically force an exit from those trades. The risk grows when higher borrowing costs coincide with a strengthening yen, since traders must buy yen to repay their loans. That can turn a profitable position into a loss quickly, particularly where leverage has been used.
Praneet Shah of Goldman Sachs has said exchange-rate movements alone can erase the full annualized return on carry-trade positions. The observation captures why currency volatility often matters more than a single rate increase: even a modest change in the yen can overwhelm the yield advantage earned elsewhere.
Yen weakness has kept carry-trade pressure contained
The yen has weakened to around 159 per U.S. dollar, reversing more than half of its earlier gains associated with Japanese currency intervention. A weaker yen generally improves carry-trade economics by reducing repayment pressure for borrowers who sold the currency.
That exchange-rate cushion may help explain why Bitcoin has held up through the latest bond-market move. The cryptocurrency remained above $78,700 during the selloff in Japanese government bonds, avoiding the immediate forced deleveraging that can occur when the yen rises sharply.
The August 2024 episode remains the clearest recent comparison. Yen appreciation then occurred alongside a rapid reduction in risk positions across markets, driving a steep one-day loss in Japanese shares and a sharp Bitcoin decline. A repeat would depend less on the Bank of Japan’s rate decision alone than on whether the yen strengthens abruptly after it.
Currency intervention is also part of the equation. The supplied figures state that Japanese authorities recently spent nearly $59 billion in a single day to support the currency. Such action can quickly alter exchange-rate expectations and force traders to reassess positions financed in yen.
A move below 150 yen per dollar would place greater attention on whether institutions are reducing overseas exposures. That threshold is not a mechanical trigger for market liquidation, but a stronger yen would make highly leveraged carry strategies progressively less attractive.
Japan’s debt burden complicates the policy outlook
The Bank of Japan faces this tightening decision as Japan’s government debt continues to grow. Outstanding Japanese government bonds reached a record 1,346 trillion yen, or about $9.1 trillion, by late June, according to the figures provided. Official projections point to 1,492 trillion yen by the end of the current fiscal year.
Higher long-term yields increase the eventual cost of refinancing that debt. The effect builds gradually because the government’s debt matures over different periods, but sustained higher yields would raise fiscal pressure as older, low-coupon bonds are replaced.
Prime Minister Sanae Takaichi has proposed reducing Japan’s consumption tax to 1% for two years beginning in April 2027. The proposal is expected to create a fiscal gap of about 5 trillion yen, adding another element for bond traders to consider as they assess future government borrowing needs.
The central bank has also said it plans to slow the pace of balance-sheet reduction from April 2027. That would temper the withdrawal of central-bank demand from the bond market, even as the Bank of Japan lifts policy rates and investors demand higher yields for holding long-dated government debt.
Japan’s overseas portfolio decisions are being watched as well. The country cut its U.S. Treasury holdings by $26.4 billion in June to $1.117 trillion, according to the supplied data. The reduction coincided with the U.S. 10-year Treasury yield reaching 4.74%, although a single month’s change in official holdings does not establish a direct cause for the move in U.S. yields.
Crypto market faces a policy test in September
Bitcoin’s ability to stay above $80,000 during rising Japanese yields suggests that traders have not yet treated the bond move as an immediate deleveraging event. The Sept. 17–18 Bank of Japan meeting could change that assessment if officials raise rates and signal a faster path toward further tightening.
Market attention will extend beyond a possible move to 1.25%. Guidance on the eventual destination for Japanese rates, including whether policy could approach 2%, would affect expectations for yen borrowing costs over a longer period.
Leverage in Bitcoin derivatives has already shown signs of easing. Vetle Lunde said Bitcoin futures open interest had fallen to 284,000 BTC, its lowest level since May. Lower open interest can reduce the risk of a rapid cascade of liquidations, although it does not eliminate losses during a sudden currency-driven selloff.
Japan’s domestic cryptocurrency market is also becoming more structured. Nomura-linked Laser Digital received Japan’s first new crypto trading-venue license in four years, while a Nomura survey found that 79% of respondents planned to invest in Bitcoin within the next three years. Japan has also revised the Financial Instruments and Exchange Act to classify crypto assets as financial products, a framework linked to proposals for spot crypto ETFs in 2027.
Those domestic developments may support longer-term participation in the market, but they do not insulate Bitcoin from shifts in global funding conditions. The immediate test remains whether Japan’s higher yields and a potentially firmer yen begin to unwind positions that were built when yen financing was substantially cheaper.
Rising yen yields and Bitcoin volatility? Deepen your macro-crypto insight with this detailed rate-and-BTC explainer now.
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