Japan’s 10-year government bond yield rose to 2.32%, near its highest level since 1999 and 30 basis points above the peak of the 2008 financial crisis. The five-year Treasury yield rose to 1.72%, just one basis point shy of its all-time high. The move comes as Brent crude oil prices are trading above $113 per barrel. conflict The US Treasury market has remained under pressure in recent weeks.
The crisis is not in the yield numbers themselves. It’s all re-pricing built on the premise that that number will never be achieved.
A system designed for zero
Japan’s financial structure is designed around near-zero interest rates continuing indefinitely. After the asset bubble burst in the 1990s, the Bank of Japan kept interest rates near zero for more than two decades to fight deflation and stimulate growth.
Insurance companies, pension funds and bank portfolios are all built on the assumption that this will never change. As yields rise, the market value of existing low-interest bonds falls, and the damage is already visible. Japan’s four major life insurance companies have already reported unrealized losses on their holdings of domestic government bonds at an estimated $60 billion, four times the amount from a year ago.
“Interest rates themselves are not the crisis. It’s the repricing of everything downstream from interest rates that is the crisis,” said market analyst Ganesh Kompela.
The Bank of Japan left interest rates unchanged last week, but signaled a shift to hawkish policy. Governor Ueda said that even if growth slows, there is still a chance of rate hikes as long as underlying inflation is maintained. The market has priced in a 60% probability of April’s move. Goldman Sachs Japan expects the Bank of Japan to wait until July.
Structural pressures existed even before the war. Mr. Takaichi’s fiscal expansion plans alarmed the bond market as early as January, causing the yield on the 40-year bond to soar above 4% in a one-off. The energy inflation shock added by the Iran war cannot be easily absorbed or ignored by Japan.
Carry trade built around the world with a cheap yen
Japan imports more than 90% of its oil from the Middle East, and the amount of crude oil passing through the Strait of Hormuz is currently less than 10% of prewar levels. This energy dependence directly affects imported inflation, a classic stagflation trap that forces the Bank of Japan to tighten despite the economic stagnation.
This precedent is not hypothetical. When the Bank of Japan raised interest rates in August 2024, a sudden unwinding of carry trades wiped $600 billion from the cryptocurrency market, sending Bitcoin up to $49,000 and causing $1.14 billion in liquidations within days.
Meanwhile, USDJPY is approaching 160, a level that triggered multiple interventions by the Treasury in 2024. Japanese authorities warned on Monday that they were “fully prepared to act” on currency movements. TD Securities predicts that the joint intervention between Japan and the US could cause stock prices to fall by five to six digits.
Risk assets cannot remain isolated
One market source said, “Japan has been the backbone of global liquidity. When yields rise in Japan, the cost of capital rises everywhere. It’s not local, it’s global.”
Japanese investors hold an estimated $1.2 trillion in U.S. debt, the largest external position of any country. As domestic yields rise, the marginal demand for foreign debt weakens, putting upward pressure on global interest rates.
Morgan Stanley estimates that approximately $500 billion of yen carry positions remain outstanding. Once these restrictions are eased, assets such as stocks, emerging market bonds, and virtual currencies that are financed with cheap yen will face forced sales. Bitcoin’s 30-day futures basis has already been compressed to around 5% from over 15% at the beginning of 2025, a sign that carry fund leverage is being undone. If the yen carry trade accelerates the withdrawal from the yen carry trade, forced selling across stocks, emerging market bonds, and cryptocurrencies will continue. The process has no policy backstop and no clear endpoint.
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