Rising Japanese Bond Yields and the Ripple Effect on Global Risk Assets and Crypto Markets

The yen carry trade, a cornerstone of global liquidity for decades, is undergoing a seismic shift as Japan's monetary policy normalizes. With Japanese 10-year government bond yields surging to 1.95% as of December 2025-a 0.90 percentage point increase year-over-year-the cost of funding leveraged positions in risk assets has risen sharply. This unwinding of the carry trade, historically a silent engine of speculative capital flows, is now exerting destabilizing pressures on global equity and crypto markets, particularly those reliant on low-cost liquidity.

The Carry Trade's Historical Role and Its Unraveling

For years, Japan's ultra-low interest rates enabled investors to borrow yen at near-zero costs and deploy the proceeds into higher-yielding assets, from U.S. tech stocks to cryptocurrencies. This mechanism not only fueled asset appreciation but also masked the fragility of leveraged positions. However, the Bank of Japan's (BOJ) recent rate hikes-pushing yields to multi-decade highs-have eroded the profitability of these trades. As of November 2025, Japan's 10-year bond yield stood at 1.73%, signaling a pivotal shift in monetary policy.

The result? A partial repatriation of capital to Japan, tightening liquidity globally and triggering forced deleveraging in risk assets.

Global Equities: Selloffs and Liquidity Stress

The unwinding has disproportionately impacted momentum-driven equities and emerging market stocks, which rely heavily on carry-trade-fueled liquidity. As Japanese institutions liquidate positions to repay yen liabilities, global equity markets have experienced heightened volatility. For instance, U.S. momentum stocks and emerging market equities faced sharp selloffs in late 2025, with liquidity constraints exacerbating price declines. The Federal Reserve's concurrent quantitative tightening further compounded these pressures, reducing the availability of funding for leveraged positions.

Precious metals, however, have emerged as safe-haven beneficiaries. Gold prices surged to record highs as investors sought refuge from the turbulence, reflecting a broader flight to liquidity amid the carry trade's unraveling.

Crypto Markets: Volatility and Leverage Risks

Cryptocurrencies, particularly Bitcoin, have proven acutely sensitive to shifts in global liquidity. In late 2025, Bitcoin experienced a sharp decline amid surging Japanese bond yields, as traders unwound leveraged positions. The unwinding also widened bid-ask spreads in crypto markets, a direct consequence of reduced market depth and heightened volatility. Leverage ratios, often exceeding 10:1 in speculative crypto positions, have amplified these effects, with forced liquidations intensifying price swings.

Japan's planned 20% crypto tax in 2026 adds another layer of uncertainty, potentially exacerbating liquidity strains in an already fragile environment. Yet, analysts argue the scale remains manageable, with only a fraction of the $1–2 trillion carry trade complex at risk of sudden liquidation.

Policy Dynamics and Market Resilience

The BOJ's gradual normalization of rates-raising its benchmark rate to 0.75% in December 2025-has mitigated the risk of a disorderly unwind. Speculative net long yen positions, which have remained bullish since early 2025, further limit the potential for abrupt yen spikes. However, the normalization of Japanese monetary policy signals the end of an era in which ultra-loose conditions reliably supported global risk appetite.

Central banks and policymakers face a delicate balancing act. While the unwinding is unlikely to disrupt the AI-driven industrial boom in the U.S., it could sustain higher U.S. Treasury yields, counteringact the expected easing from the Federal Reserve. Interventions by the BOJ or Japan's Ministry of Finance remain a possibility should USD/JPY approach critical technical levels as indicated in market outlooks.

Conclusion: A Gradual Repricing, Not a Systemic Crisis

The unwinding of the yen carry trade is best characterized as a repositioning rather than a systemic collapse. While short-term turbulence is inevitable-manifesting in tighter liquidity, wider spreads, and forced deleveraging-the broader economic impact remains confined to financial markets as analysts conclude. For investors, the key takeaway is clear: liquidity-driven assets, particularly those with high leverage, require closer scrutiny in an environment of shifting monetary policy. As Japan's yield curve steepens and global capital realigns, the era of carry-trade-fueled complacency is giving way to a new paradigm of macroeconomic vigilance.