Why Japan’s Bond Market Could Kill the Easy-Money Rally in Stocks and Bitcoin

Japan’s bond market stress deepened Monday as the 10-year yield touched 2.825%, its highest level since October 1996. The surge threatens the easy money that funded multi-year rallies in stocks and Bitcoin (BTC).

The yen trades near 162 per dollar, its weakest since 1986, even after Tokyo spent a record sum defending it this spring.

Japan 10-Year Treasury Yields. Source: TradingView

Japan Bond Market Faces More Supply and a Shrinking Buyer

Prime Minister Sanae Takaichi’s government plans to mobilize over ¥370 trillion ($2.28 billion) in public and private investment across 17 strategic sectors through fiscal 2040. The roughly $2.3 trillion program implies heavier bond issuance ahead.

Meanwhile, the Bank of Japan keeps trimming its bond purchases. Reuters reported that policymakers may pause the taper only from fiscal 2027. Until then, the market’s largest buyer keeps stepping back.

Demand elsewhere looks fragile. A weak 10-year auction preceded Monday’s yield spike, and 20-year and 40-year sales follow later this month. Japan’s debt above 200% of GDP leaves little room to absorb higher borrowing costs.

“Less demand at auction plus more supply plus a smaller BOJ bid means yields get pushed higher mechanically, not just sentimentally,” noted macro analyst Bull Theory.

Carry Trade Unwind Risk Hangs Over Bitcoin and Stocks

Investors have borrowed cheap yen for years to fund positions in US equities, Treasuries, and crypto. Higher Japanese yields raise that funding cost and give capital a reason to come home. Repaying those loans means selling the very assets the borrowed money bought.

The precedent is fresh. A surprise BOJ hike in July 2024 triggered a carry trade unwind, which the Bank for International Settlements later detailed in a bulletin.

The Nikkei fell 12.4% on August 5, 2024, its worst day since 1987. Bitcoin briefly slid below $50,000 in the same rout.

NIKKEI Performances in August 2024. Source: TradingView

Positioning now looks stretched again. Data compiled by LSEG shows yen short bets near $11.3 billion, the largest since July 2024.

Policy tools are losing traction. The Ministry of Finance disclosed a record ¥11.73 trillion ($73.6 billion) in yen-buying intervention between April 28 and May 27. The currency has since surrendered all of those gains and returned to four-decade lows.

JPY/USD Performance. Source: TradingView

The BOJ’s June 16 hike to 1%, its highest rate in 31 years, changed little. Goldman Sachs responded with a more bearish forecast, seeing the yen at 165 per dollar within a year. Analysts already frame further BOJ hikes as a direct risk for Bitcoin.

Bitcoin traded near $63,676 at press time, up 3% over the past 24 hours. Equities carry similar exposure after the Nikkei’s record run in June.

This week’s 30-year auction and the BOJ’s next signals now become key tests. A gradual adjustment would let markets adapt, while a disorderly unwind could spread volatility across stocks and crypto within days.

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