BOJ's Decades-Long Ultraeasy Policy Nears End, Triggering Global Yield Surge

The U.S. 10-year Treasury yield surged to 4.086% on December 1, 2025, driven by shifting capital flows as Japanese investors repositioned funds in response to the Bank of Japan's (BOJ) signals of a potential rate hike. The move reflects growing global market volatility as Japan's long-standing ultraloose monetary policy appears to be nearing a turning point, with cascading effects on bond yields, currency markets, and risk assets.

The BOJ's hawkish pivot began with Governor Kazuo Ueda's remarks on December 1, [in which he stated the central bank would "consider the pros and cons"](https://www.cnbc.com/2025/11/26/boj-preps-markets-for-near-term-hike-as-weak-yen-overshadows-politics.html) of raising interest rates at its December 18-19 policy meeting. This marked a sharp departure from previous dovish rhetoric and reignited expectations of a rate hike after decades of near-zero borrowing costs. Japanese 10-year government bond (JGB) yields [climbed to 1.845%](https://markets.businessinsider.com/news/stocks/yen-carry-trade-boj-japan-interest-rate-hike-stocks-bonds-2025-12), their highest level since 2008, while the two-year yield hit 1%-also a 17-year high. The yen strengthened against the dollar, further amplifying concerns about the unraveling of the yen carry trade, where investors borrowed cheap yen to fund higher-yielding global assets .

Analysts warn that the BOJ's tightening could tighten global financial conditions. [Ryan Jacobs of Jacobs Investment Management noted](https://markets.businessinsider.com/news/stocks/yen-carry-trade-boj-japan-interest-rate-hike-stocks-bonds-2025-12) that a stronger yen and rising Japanese yields could pull capital away from U.S. equities and bonds, creating a "ripple effect" across asset classes. The yen carry trade unwind, reminiscent of the August 2024 market turmoil, has already pressured cryptocurrencies, with Bitcoin dropping as much as 8% on Monday . The yen's 0.4% gain against the dollar further highlighted shifting liquidity dynamics, as investors reassessed risk premia amid tighter Japanese monetary policy .

Political alignment between the BOJ and the government has eased concerns about policy divergence. Finance Minister Satsuki Katayama affirmed no gap between the government and the BOJ's economic assessment, emphasizing continued collaboration to achieve the 2% inflation target . Meanwhile, Prime Minister Sanae Takaichi's reflationist agenda appears to have lost urgency as yen weakness and inflationary pressures take precedence. The BOJ's internal shift toward tightening is also evident, with board members like Junko Koeda and Kazuyuki Masu advocating for rate hikes to address inflation risks .

Looking ahead, the U.S. Federal Reserve's December 10 rate decision and potential cuts could influence the BOJ's timing. However, markets are now pricing in [a 76% probability of a December hike](https://www.cnbc.com/2025/11/26/boj-preps-markets-for-near-term-hike-as-weak-yen-overshadows-politics.html) and over 90% for January. If realized, this would mark the BOJ's first rate increase since 2008 and signal a broader normalization of global monetary policy.

The ripple effects extend beyond bonds. U.S. equities faced downward pressure as risk-off sentiment took hold, with the S&P 500 and Nasdaq 100 both declining by 0.2% . For crypto markets, the reversal of cheap yen-based carry trade capital threatens to exacerbate bearish trends, as speculative flows retreat toward safer assets.