Japan's Two-Year Bond Yield at 31-Year Peak, Impact on Yen Carry Trade and Bitcoin

On Monday, Japan's two-year government bond yield rose to 1.746%, marking a 31-year high. This increase makes the yen carry trade more expensive, a strategy that has financed global risk assets such as Bitcoin (BTC).

The two-year yield reflects trader expectations for Bank of Japan (BOJ) policy. Swap markets currently indicate about 88% probability of a rate hike in September.

Japan Deployed $97 Billion, Yet Yen Continued to Decline

In June, the BOJ raised its policy rate to 1%, the highest since 1995. Longer-term bonds also saw yields rise. The 10-year JGB yield is now around 2.93%.

Typically, higher rates bolster a currency, but the yen weakened. On Friday, it traded at 160.16 per dollar, and on Monday it again reached 160.20.

Between July 30 and August 26, Japan spent 15.4 trillion yen (about $97 billion), including a rare joint intervention with the US on July 31. Despite this, the yen has given back more than half of those gains.

Interest Rate Differential Narrows, but Yen Continues to Fall

The US-Japan two-year yield spread has contracted to 2.64%, down from a peak near 5% in 2023-2024. The carry incentive has been halved.

For 40 years, the yen closely followed that spread. Now they have diverged. The yen weakens even as the benefit of borrowing yen declines.

This divergence suggests factors beyond interest rates are driving the yen. Growing losses on Japanese bonds and substantial debt issuance indicate a confidence issue that higher rates cannot address alone, as reported in Japanese bond losses analysis.

Implications of the Yen Carry Trade for Bitcoin

Investors borrow yen at low rates and invest in higher-yielding foreign assets. A sharp yen rise makes repaying those loans more expensive, potentially leading to forced selling.

This was evident in August 2024, when Bitcoin and Ethereum fell up to 20% as yen-funded positions were unwound.

Bitcoin is currently trading at $79,087, up 1.3% in the past 24 hours. Last week, it fell below $77,000 after hawkish comments from Fed Chair Kevin Warsh, as reported by BeInCrypto.

Thus, the BOJ's September decision is more significant as a benchmark than as a surprise. An 88% probability of a hike is already priced in, according to Bloomberg. Meanwhile, the carry trade position that remains to be unwound continues to grow.