Japanese Sovereign Bond Yields Trigger Reassessment of Risk Assets in November 2025

The Japanese sovereign bond market has emerged as a pivotal factor in global risk asset sentiment during the final weeks of November 2025. The shift is tied to the evolution of real interest rates and the broader implications for the yen carry trade, which has been in a long-term unwind. These developments are reshaping investor behavior and creating ripple effects across equity and currency markets.

The Carry Trade Unwind Gains Momentum

The yen carry trade, a strategy that involved borrowing in Japanese yen and investing in higher-yielding global assets, was historically supported by the Bank of Japan’s ultra-loose monetary policy. For nearly a decade, Japanese interest rates remained negative, making Yen borrowing effectively free. Investors took advantage of the low-cost liquidity to purchase foreign assets, especially in higher-interest environments such as the U.S. and Europe.

However, this trade has been systematically unwinding since the early 2020s, particularly as Japanese bond yields began to rise. In 2025, the trend has accelerated, with the 40-year (JGB) hitting all-time high yields. This increase in real interest rates has made the carry trade less attractive, prompting large-scale deleveraging across institutional investor portfolios. As a result, global risk assets face increased selling pressure, as hedging of yen liabilities requires liquidation of non- yen holdings.

Policy Divergence and Currency Market Implications

The unwinding of the yen carry trade is further amplified by shifting monetary policy dynamics. The Bank of Japan’s gradual shift away from ultra-easy monetary policy in 2024 has created a more balanced interest rate differential with other central banks, particularly the U.S. Federal Reserve and the . This narrowing spread has reduced the tailwind for the U.S. Dollar and other high-yield currencies at the expense of the Yen.

Currency markets have responded with a stronger Yen, . These levels reflect both the changing interest rate landscape and increased risk-off sentiment. Investors have also turned to the Yen as a safe-haven asset amid global economic uncertainty, especially as concerns mount over Japan’s public finances following the approval of a large stimulus package.

Risk Assets Face Pressure

The impact of rising Japanese bond yields on global risk assets has been significant. As investors rebalance their portfolios to reduce exposure to yen liabilities, there has been a noticeable selloff in equities and other high-risk investments. This selling pressure has been most evident in markets where leveraged investors or hedge funds had significant yen-linked positions.

In Asia, equity markets have shown mixed performance, with some gains driven by optimism around U.S. easing. However, underlying risk appetite remains cautious, with investors weighing the ongoing yen weakness and potential central bank intervention. In Japan, the Nikkei 225 and Topix Index have experienced intraday volatility, as traders anticipate potential BoJ intervention to curb excessive yen depreciation.

Forward-Looking Market Concerns

The current trajectory of Japanese bond yields has raised concerns about the broader implications for global markets. Analysts project that continued rate normalization in Japan could lead to further selloffs in risk assets unless hedging strategies are adjusted to accommodate the new cost of capital. The unwinding of the carry trade is expected to persist for the remainder of 2025, with markets likely to remain sensitive to BoJ policy signals and fiscal developments.