Japan's Yield Surge Exposes Global Carry Trade Weaknesses

Japan's 30-year government bond yield has approached 3.3%, marking a significant shift from its long-standing zero-rate policy and signaling the potential end of the global carry trade era [1]. The Bank of Japan (BoJ) has ended its yield-curve control (YCC) program, which had historically suppressed long-term yields, and has initiated quantitative tightening (QT) to reduce its bond-buying activities [3]. This policy normalization has allowed term premiums to rise, with the 30-year yield surging by over 60 basis points since January 2025 [4]. Analysts note that the rapid increase in yields, driven by reduced central bank intervention and waning demand from domestic investors like life insurers, has created a structural imbalance in the bond market [3].

The yield spike has triggered concerns about a global carry trade unwind, as Japanese investors-historically major participants in low-cost yen-funded investments abroad-may repatriate capital. The BoJ's reduced bond purchases and the Bank of Japan's recent tapering of its QT program have further exacerbated upward pressure on yields [3]. With the 30-year JGB yield nearing 3.3%, the yield spread against U.S. Treasuries has narrowed, reducing the incentive to maintain carry positions [4]. This dynamic has already led to a 1.9% decline in the USD/JPY exchange rate since April 2025, and analysts warn of a broader unwind if yields continue to rise [3].

The implications extend beyond Japan's borders. Elevated JGB yields increase borrowing costs for corporations and governments globally, potentially dampening economic growth. The U.S. 30-year Treasury yield has risen by 81 basis points to 5.15% since May 2025, while German long-term bond yields have climbed 36 basis points [3]. Société Générale's Albert Edwards has described the scenario as a potential "global financial market Armageddon," with U.S. tech stocks particularly vulnerable due to their reliance on Japanese capital [4].

Market participants are closely monitoring the BoJ's inflation trajectory, which has remained above its 2% target for seven consecutive months. Core-core CPI hit 3.3% year-on-year in May 2025, prompting the BoJ to slow its QT pace in June by halving quarterly bond purchase reductions to 200 billion yen [3]. However, if inflation persists, the central bank may resume rate hikes, further pressuring yields.

While some analysts caution against overestimating the immediate impact, they acknowledge a gradual unwind of carry trades is underway. Amundi's Guy Stear notes that the U.S.-Japan 2-year yield gap has narrowed from 450 to 320 basis points since Q2 2024, reducing the appeal of yen shorting [4]. State Street's Masahiko Loo argues that Japan's foreign asset holdings, concentrated in U.S. equities rather than Treasurys, may limit the severity of outflows [4]. Nevertheless, the risk of a prolonged erosion in confidence toward the U.S. dollar and yen carry positions remains [3].

The BoJ's policy shift has also reignited debates about global liquidity. With Japan's external assets reaching a record 533 trillion yen ($3.7 trillion) in 2024, any large-scale repatriation could tighten global financial conditions and curb world growth to 1% [4]. Experts emphasize that the current scenario differs from the abrupt August 2024 carry trade unwinding, which saw a 13% drop in USD/JPY. Instead, they anticipate a more prolonged adjustment as confidence in the yen and Japan's fiscal sustainability evolves [3].