Japan’s bond market is undergoing one of its most dramatic repricing events in modern history.

The implications may extend far beyond domestic fixed income, potentially spilling into global risk assets, including Bitcoin.

Liquidity Tightening Raises Pressure on the Yen Carry Trade

Japanese government bond (JGB) yields have surged sharply since the start of 2026. The 10-year yield has climbed to around 2.12%, its highest level since 1999, while the 30-year yield has reached a record of nearly 3.5%.

10-Year JGB yield reaches highest level since 1999 at 2.12%

In total, yields have risen by roughly 104 and 120 basis points, respectively, a scale of adjustment rarely seen in Japan’s long era of ultra-low rates.

The repricing reflects mounting concern over Japan’s fiscal and monetary trajectory. The government recently approved a record $780 billion budget for fiscal year 2026. This move intensified fears over deficit expansion at a time when inflation pressures are no longer purely theoretical.

Persistent yen weakness has further raised doubts over whether the Bank of Japan (BoJ) is falling behind the curve on inflation control.

Analysts at the Kobeissi Letter see the move as one of the most dramatic bond market repricings in Japanese history. They note that losses are accelerating as investors price in higher deficit spending and policy uncertainty.

For decades, Japan’s bond market was defined by stability and central bank dominance. That assumption is now being challenged.

At the same time, signs of genuine liquidity contraction are emerging. Market commentator Money Ape warned that Japan’s liquidity is “drying up fast,” pointing to a 4.9% drop in cash in circulation in 2025, the first decline in 18 years.

For a system built on abundant liquidity, the shift is significant.

Yen Carry Trade Unwinds Pose a Slow-Burning Risk to Bitcoin and Crypto

This tightening dynamic raises concerns about the global yen carry trade, a cornerstone of international risk-taking for years. Investors have long borrowed cheaply in yen to fund positions in higher-yielding assets across equities, emerging markets, and crypto.

As Japanese yields rise and funding conditions tighten, those trades become increasingly vulnerable to forced unwinds.

RadarHits noted that the jump in the 30-year yield to record highs is placing direct pressure on carry trade positioning.

“Japan’s 30-year yield rises to 3.5%, the highest level ever. Pressure building on the yen carry trade,” they wrote.

If unwinding accelerates, risk assets that benefited from yen-funded liquidity, including Bitcoin, could face renewed volatility.

Some analysts argue that the danger lies in how slowly the stress is unfolding. Among them, JustDario, who described the situation as a “boiling frog syndrome,” where structural pressure builds gradually enough that investors fail to react until instability becomes unavoidable.

In this view, Japan’s financial system, which forms the foundation of the global JPY carry trade, is weakening in real-time, even if a crisis has not yet fully materialized.

However, the picture is not one-dimensional. Despite higher nominal rates, Japan’s real interest rates remain negative, a factor that continues to support liquidity and risk-taking.

Capital Flows highlighted that this dynamic helps explain why Japanese equities remain near all-time highs and why global capital continues to flow through Japan’s markets.

“This means there is a TON of liquidity in their market. You think the Fed is accommodative? It’s nothing compared to BoJ,” the analyst wrote.

This paradox, where tightening signals run alongside negative real rates, complicates the outlook. The risk is less about an immediate shock and more about whether a prolonged unwind of the carry trade could quietly remove a key source of global liquidity.

As of early January 2026, Japanese yields remain volatile and unsettled. Whether the BoJ can engineer a soft landing or whether bond market stress triggers wider financial dislocations may prove critical for Bitcoin’s macro backdrop, just as it would for Japan in the months ahead.