Event Overview
Recently, the yield on Japan's two-year government bonds rose to 1.155%, not only marking a new high since 1996 but also being seen by the market as a signal of a "historical high point range." At the same time, yields on medium to long-term bonds, such as the 10-year and 30-year bonds, also increased, with the 10-year yield briefly surpassing 1.8% and the 30-year yield approaching 3.41%. This collective rise in yields is not an isolated technical fluctuation but is driven by a combination of significantly weak demand in Japanese government bond auctions, investors demanding higher compensation, and expectations that Japan may end its decades-long ultra-loose monetary policy. In the short term, funds that were originally cautious about a policy shift in Japan began to interpret this change as a confirmation of the "end of the zero interest rate era," leading global risk asset sentiment to shift from hesitation to a clear defensive mode. Especially after the re-pricing of interest rates in Japan, which has a debt-to-GDP ratio exceeding 260% and is considered one of the world's largest "interest rate leverage points," the market is concerned that yen arbitrage unwinding and global liquidity recovery will cause more severe price and leverage liquidation shocks to highly volatile crypto assets like Bitcoin, leaning towards a drastic adjustment that first kills valuations and then re-evaluates logic.
Yield Curve Anomalies
The two-year yield had just broken through 1%, marking the first time it reached this level since 2008. After this breakthrough, it quickly rose to 1.155%, with the speed prompting many institutions to compare it to the interest rate hike cycle of the mid-1990s. Since 1996, Japan has long been trapped in an environment of near-zero or even negative interest rates, with short-term yields suppressed at extremely low levels. The rise from near zero to over 1% and then approaching 1.2% is seen as one of the most "trend-significant" changes in nearly thirty years. Meanwhile, the 10-year yield is pushing towards 1.8%, and the 30-year yield briefly rose to around 3.4%, forming a yield curve pattern that shows almost a full-line increase from short to long ends, signaling the market's systemic upward revision of future inflation, interest rates, and risk premiums. More critically, recent Japanese two-year government bond auctions have shown weak subscription demand, forcing the winning yield to rise, with bid multiples declining, indicating that investors are only willing to take on bonds at higher interest rate levels. This has accelerated the jump in short-term rates, further driving an aggressive repricing of expectations for the Bank of Japan's future policy path and amplifying the self-reinforcing mechanism of rising interest rates in trading.
Policy and Debt Pressure
In terms of policy expectations, the market had gradually viewed the Bank of Japan's December meeting as a key node, with related pricing at one point showing an over 80% probability of a rate hike in December. After Governor Ueda Kazuo repeatedly signaled "early tightening," some institutions further raised the probability of a January rate hike to about 90%, believing that the policy shift has moved from "speculation" to "consensus." This means that the decades-long framework of zero interest rates and yield curve control (YCC) is being gradually dismantled, and the "end of the zero interest rate era" has already been reflected in bond pricing and exchange rate performance. The problem is that Japan's government debt is extremely large, with a debt-to-GDP ratio exceeding 260%. At such a high leverage level, every 100 basis point increase in interest rates will significantly amplify fiscal interest expenditure pressure, forcing the government to squeeze more resources from the budget to pay interest, weakening other spending space, and exposing the sustainability of debt under a higher interest rate environment. The rapid surge in yields is seen as both an inevitable cost of inflation and monetary normalization, while also pushing the Bank of Japan into a dilemma: if it raises rates more aggressively to stabilize the yen, curb inflation, and prevent capital outflows, it may exacerbate selling pressure in the government bond market and fiscal instability; if it continues to suppress rates through bond purchases and verbal guidance, it may worsen yen depreciation and imported inflation risks, damaging policy credibility. This tug-of-war itself is viewed by the market as a potential source of systemic risk.
Funding and Sentiment
A significant rise in yields often resonates with a strengthening of the local currency, and Japan is no exception. As the yields on two-year, ten-year, and thirty-year government bonds rise, the market's pricing of the narrowing interest rate differential between Japan and overseas has increased the attractiveness of the yen, leading to a reassessment of previously large-scale short positions on the yen that sought to profit from the interest rate differentials with the dollar or other high-yield currencies. Against the backdrop of expectations for a stronger yen and rising financing costs, the average funding cost for global capital has increased, directly suppressing leveraged trading and risk appetite. Over the past year, whenever expectations for a rate hike in Japan have intensified and yields have surged, global high-risk assets have often come under pressure simultaneously, with cryptocurrencies like Bitcoin experiencing nearly 30% phase declines during related periods, reflecting the interconnected path of tightening liquidity expectations and declining risk appetite. Meanwhile, the narrative around "Japanese government bonds = global financial time bomb" has rapidly spread among social media and KOLs, with some viewpoints emphasizing that a rise in the 30-year yield above 3% would trigger a global bond price re-evaluation, leading to a chain reaction of deleveraging. Panic language and extreme comparisons will amplify hedging sentiment and protective selling in the short term, reinforcing already fragile market sentiment and causing price volatility to significantly exceed changes in fundamental variables.
Crypto Market Linkage
Historically, rising expectations for rate hikes in Japan and soaring yields have often coincided with deep corrections in the crypto market. Research shows that during the early December phase when rate hike expectations concentrated and the two-year yield reached its highest level since 2008, leading cryptocurrencies like Bitcoin recorded nearly 30% maximum drawdowns, with some highly leveraged altcoins experiencing even more exaggerated declines. The reasons are not singularly negative but rather the chain effects of synchronized adjustments in global liquidity prices. In an environment where global capital views Japan as a key source of financing, once the cost of yen financing rises and arbitrage trades shrink, the "cheap leverage" available for betting on high-volatility assets naturally tightens, amplifying the sensitivity of crypto assets to changes in interest rates and exchange rates. A stronger yen and narrowing interest rate differentials with the dollar or other major currencies will lead institutions to reassess the risk-reward ratio of crypto asset and yen-related arbitrage strategies within multi-asset portfolios: on one hand, some funds may passively reduce crypto positions to cope with margin pressures or to cover yen liabilities; on the other hand, some funds may actively lower the weight of high-beta assets, withdrawing leverage from crypto and emerging markets to buffer against potential risks of further rising interest rates. This cross-asset and cross-market rebalancing logic means that changes in Japanese government bond yields can transmit to the crypto market through three paths: funding costs, leverage constraints, and risk budgets.
Long and Short Logic Game
From a bearish perspective, the rise in Japanese interest rates is seen as the starting point for global deleveraging: falling bond prices, rising financing costs, and yen arbitrage unwinding will force a rewrite of valuations for a series of assets predicated on a low-interest-rate environment, with risk assets facing overall valuation compression and increased volatility. Coupled with Japan's debt-to-GDP ratio exceeding 260% and the 30-year yield breaking above 3%, which has been described as "shaking the foundation of global finance," the bearish chain is typically deduced as: Japanese government bond selling pressure → global interest rate center moving up → asset discount rates increasing → bubbles in high-valuation assets like stocks and crypto being squeezed. From a bullish perspective, another long-term logic is emphasized: in an era of high debt, high deficits, and rising nominal interest rates to combat inflation and currency credit erosion, cryptocurrencies like Bitcoin, as assets that "do not rely on sovereign credit," have the opportunity to gain relative allocation value against the backdrop of long-term dilution of fiat currency credit. Especially in a context where traditional bond real yields have long hovered at low or even negative levels, some long-term funds view crypto assets as an option to hedge against structural risks in the monetary system. The key divergence between both sides centers on two questions: first, whether Japan will experience a debt crisis due to uncontrolled yields, triggering passive reallocation of global assets; second, whether this process will involve short-term sharp deleveraging or long-term smooth clearing, which will determine whether the crypto market undergoes a one-time severe sell-off or is gradually absorbed by longer-term funds amidst volatility.
Future Scenarios
In a relatively mild scenario, if the Bank of Japan opts for gradual rate hikes and manages to control the two-year to ten-year yields around current levels, only slowly moving up, then the impact on crypto assets is likely to remain in the "neutral to slightly bearish" range: on one hand, rising liquidity prices and a stronger yen will suppress some leverage demand, limiting the upward elasticity of the crypto market; on the other hand, as long as the yield curve does not exhibit uncontrolled steepening, risk assets still have time to digest valuations and positions. If a more extreme scenario occurs, where yields continue to rise uncontrollably, with short-term rates approaching or even surpassing higher levels, triggering concentrated concerns about the sustainability of Japan's debt, not only may yen arbitrage be massively unwound, but global risk assets may also face forced deleveraging simultaneously, with extreme volatility in the crypto market (including single-month declines exceeding 30%, concentrated on-chain liquidations, etc.) needing to be considered as high-probability events. From a trading and risk control perspective, investors should closely monitor several indicators: the rising slope and volatility of Japanese government bond yields across various maturities, the direction and magnitude of the yen against the dollar, changes in global financing rates and funding rates, as well as Bitcoin futures leverage ratios and liquidation data. In terms of position management, a more conservative approach would be to moderately reduce leverage multiples, control concentration in single assets, and reserve risk budgets before key Japanese policy meetings, using options or hedging tools to cope with tail-end volatility, rather than stubbornly holding high leverage against trend reversals at the inflection point of liquidity contraction.
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