Japan’s two-year government bond yield climbed to 1.746% on Monday, its highest level in more than 31 years. The move raises the cost of the yen carry trade that has helped fund global risk assets, including Bitcoin (BTC).
Two-year yields track what traders expect from the Bank of Japan (BOJ). Swap markets now price roughly 88% odds of a rate increase in September.
Japan Spent $97 Billion And The Yen Still Fell
The BOJ lifted its policy rate to 1% in June, the highest since 1995. Longer maturities followed. The 10-year Japanese government bond (JGB) yield now sits near 2.93%.
Higher rates would normally support a currency. Instead, the yen weakened. It traded at 160.16 per dollar on Friday and touched 160.20 again on Monday.
Tokyo deployed 15.4 trillion yen, close to $97 billion, between July 30 and August 26. That included a rare joint intervention with the United States on July 31. However, the currency has already surrendered more than half of those gains.
The Rate Gap Is Shrinking, Yet The Yen Keeps Sliding
The spread between US and Japanese two-year yields has narrowed to 2.64%. At its 2023 and 2024 peak, that gap ran close to 5%. Half the carry incentive has vanished.
For four decades, the yen tracked that spread closely. Now the two have separated. The currency keeps weakening while the reward for borrowing yen shrinks.
That divergence points away from interest rates as the main driver. Mounting Japanese bond losses and heavy debt issuance suggest a confidence problem that higher rates alone cannot solve.
What The Yen Carry Trade Means For Bitcoin Now
Investors borrow yen cheaply, then buy higher-yielding assets abroad. Sharp yen appreciation makes those loans costlier to repay. Forced selling can follow.
August 2024 demonstrated the mechanism. Bitcoin and Ethereum lost as much as 20% as yen-funded positions closed.
Bitcoin trades at $79,087, up 1.3% over 24 hours. The token slipped below $77,000 last week on hawkish remarks from Federal Reserve chair Kevin Warsh.
Therefore, the September BOJ decision matters less as a shock than as a marker. A move priced at 88% odds is largely absorbed. Meanwhile, the position that has yet to unwind keeps building.