The surge in Japanese government bond yields: the liquidity dilemma in the global crypto market

Recently, the Japanese government bond market has been quite active. The two-year yield soared to 1.155%, hitting a new high since 1996; the 10-year broke through 1.8%, and the 30-year approached 3.41%—this is not just a simple technical rebound, but a full upward shift of the entire yield curve from the short to the long end. The market is beginning to use a term to describe this: “The era of zero interest rates is over.”

What does this imply? What impact does it have on crypto assets?

A Chain Reaction of Rate Repricing

First, let’s look at what the numbers mean. Japan’s government debt exceeds 260% of GDP, the highest in the world. Under this debt leverage, every 100 basis point increase in interest rates significantly raises fiscal interest expenses, forcing the government to allocate more budget to debt repayment—this pressure is already fully reflected in market pricing.

More critically, Japan has just emerged from a “nearly 30-year zero interest rate environment.” Demand for two-year government bonds has weakened, and investors are starting to demand higher yields as compensation. The winning bid yields are forced higher, bid-to-cover ratios decline, and short-term rates accelerate upward.

This signal is very clear: the market is pricing in the Bank of Japan’s rate hikes. The probability of a rate hike in December once exceeded 80%, and in January it was pushed up to 90%. In other words, the steepening of the yield curve is not a random fluctuation but a collective market bet on policy shifts.

How Yield Curve Steepening Strangles Leverage Trading

Here, a key mechanism must be understood: Rising yields → Yen appreciation → Yen arbitrage unwinding

In recent years, large amounts of capital borrowed low-interest Yen to be converted into USD or other high-yield currencies for arbitrage. The premise of this game is: Yen remains cheap. But now? As Japanese yields rise, the market begins to favor the Yen’s relative value, meaning borrowing costs in Yen increase, squeezing arbitrage returns, and even turning them negative.

The result? Large-scale unwinding.

Assets previously supported by Yen financing—stocks, emerging markets, high-beta cryptocurrencies—are simultaneously facing deleveraging pressure. Because holders need to raise Yen to close positions, the simplest way is to sell risk assets.

Data speaks volumes: In early December, expectations of rate hikes intensified, leading to nearly 30% maximum drawdowns in leading crypto assets like Bitcoin, with some high-leverage altcoins experiencing even more dramatic declines. This is not an isolated event but a result of synchronized global liquidity price adjustments.

The “Price Shock” of Rising Global Financing Costs

From another perspective, what does rising Japanese interest rates mean?

Global funding costs are generally rising.

In an environment where Japan is a key financing source, an increase in Yen borrowing costs means that trading strategies based on “cheap leverage” need to reassess risk-reward ratios. Institutional investors are starting to passively reduce crypto positions to meet margin pressures or actively lower high-beta asset weights, pulling leverage out of crypto and emerging markets.

This is not panic but a rational risk management approach.

Meanwhile, there are circulating narratives claiming “Japanese government bonds = a global financial ticking time bomb.” The 30-year yield breaking 3% is portrayed as “shaking the foundations of global finance,” and extreme comparisons by social media influencers amplify these sentiments, reinforcing defensive selling in the market. In the short term, this narrative will further suppress upside momentum in risk assets.

Two Future Scenarios for the Yield Curve

The key question now is: what will the Bank of Japan do?

Mild Scenario: If the central bank opts for gradual rate hikes, controlling the yield curve through measured government bond purchases and communication, allowing yields to rise slowly, the impact on crypto markets is likely to be “neutral to slightly bearish.” Rising liquidity costs will suppress some leverage demand, but as long as the yield curve remains controlled, risk assets still have time to digest valuations and positions.

Extreme Scenario: If yields continue to spiral out of control, with short-term rates approaching higher levels, and markets begin to doubt Japan’s debt sustainability, then prepare for the worst. Large-scale unwinding of Yen arbitrage positions, synchronized forced deleveraging of global risk assets, and extreme volatility in crypto markets (monthly declines exceeding 30%, on-chain liquidations) could become high-probability events.

Investor Response Checklist

From a practical standpoint, it is recommended to monitor several key indicators:

Market Indicators: Upward slope and volatility of Japanese government bond yields across maturities, USD/JPY exchange rate, global financing rates and funding rate changes, Bitcoin futures leverage ratios and liquidation data.

Position Management: Moderately reduce leverage, control concentration in single assets, reserve risk budgets ahead of key Japanese policy meetings, and use options for hedging tail risks.

Core Principles: Do not aggressively hold high leverage at the turning point of liquidity contraction. The steepening of the yield curve is not a short-term phenomenon; multiple policy windows will follow. Maintain flexibility—this is the best approach during this adjustment.