Author: Liam, Deep Tide TechFlow
Let me tell you a ghost story:
The yield on Japanese two-year government bonds rose to 1% for the first time since 2008; the yield on five-year government bonds rose 3.5 basis points to 1.345%, a new high since June 2008; the yield on 30-year government bonds briefly touched 3.395%, a record high.
The significance of this event is not just "interest rates breaking through 1%", but rather:
Japan's era of extreme monetary easing over the past decade is being permanently written into history.
From 2010 to 2023, the yield on Japanese two-year government bonds hovered almost between -0.2% and 0.1%. In other words, previously, money in Japan was essentially lent to you for free, or even at a loss. This was because, since the bursting of the bubble economy in 1990, the Japanese economy had been trapped in a deflationary trap of stagnant prices, stagnant wages, and weak consumption. To stimulate the economy, the Bank of Japan used the world's most aggressive and extreme monetary policies, including zero or even negative interest rates, making money as cheap as possible. Borrowing money was practically free, and putting money in the bank required paying extra, thus forcing people to invest and consume. The recent shift in Japanese government bond yields from negative to positive, rising to 1%, not only concerns Japan itself but also has global implications, in at least three aspects: First, it represents a complete shift in Japanese monetary policy. Zero interest rates, negative interest rates, and yield curve control (YCC) are over; Japan is no longer the only major economy maintaining "extremely low interest rates," and the era of loose monetary policy has completely ended. Second, it has also changed the global capital price structure. In the past, Japan was one of the world's largest overseas investors (especially pension funds, insurance companies, and banks). This was due to low domestic interest rates, which drove Japanese companies to invest heavily overseas in pursuit of higher returns, particularly in the US, Southeast Asia, and China. Now, with rising domestic interest rates, the incentive for Japanese funds to "go overseas" will decrease, and they may even shift back to Japan. Finally, and this is the point traders are most concerned about, a 1% increase in Japanese interest rates means that the global arbitrage (carry trade) funding chain that has relied on Japan over the past 10 years will experience a systemic contraction. This will affect US stocks, Asian stocks, the foreign exchange market, gold, Bitcoin, and even global liquidity. Because carry trade is the hidden engine of global finance. Yen carry trade is gradually coming to an end. Over the past decade, a major reason for the continuous rise of global risk assets such as US stocks and Bitcoin has been yen carry trade. Imagine you can borrow money in Japan for almost nothing. Borrow 100 million yen in Japan at an interest rate of only 0% to 0.1%, then convert that 100 million yen into US dollars and use it to buy US government bonds with yields of 4% or 5%, or to buy stocks, gold, or Bitcoin. Finally, convert that money back into Japanese yen to repay the loan. As long as the interest rate differential exists, you make money; the lower the interest rate, the greater the arbitrage opportunity. There isn't a publicly available precise figure, but global institutions generally estimate that the scale of yen arbitrage is between $1 trillion and $2 trillion, and possibly between $3 trillion and $5 trillion. This is one of the largest and most hidden sources of liquidity in the global financial system. Many studies even suggest that arbitrage is one of the real driving forces behind the record highs of US stocks, gold, and Bitcoin over the past decade. The world has been using "free Japanese money" to inflate the prices of risky assets. The yield on Japan's 2-year government bonds has now risen to 1% for the first time in 16 years, meaning that part of this "free money pipeline" has been shut down. The result is: Foreign investors can no longer borrow cheap yen for arbitrage, putting pressure on the stock market. Domestic funds in Japan are also beginning to flow back home, especially from Japanese life insurance companies, banks, and pension funds, which will reduce their allocation to overseas assets. Global funds are beginning to withdraw from risky assets; a stronger yen often signifies a decline in global market risk appetite. What will be the impact on the stock market? The US stock market's bull run over the past 10 years was driven by an influx of cheap global capital, with Japan being one of the biggest pillars. Rising interest rates in Japan directly hinder the large-scale inflow of funds into the US stock market. Especially now, with US stock valuations extremely high and the AI theme facing skepticism, any withdrawal of liquidity could amplify a correction. The entire Asia-Pacific stock market will also be affected, with markets like South Korea, Taiwan, and Singapore having previously benefited from yen carry trade. As Japanese interest rates rise, funds begin to flow back to Japan, increasing short-term volatility in Asian stock markets. For the Japanese stock market itself, rising domestic interest rates will put downward pressure on the market in the short term, especially for companies heavily reliant on exports. However, in the long run, interest rate normalization will allow the economy to escape deflation and re-enter a development phase, leading to a rebuilding of valuation systems, which is ultimately beneficial. This may explain why Buffett continues to increase his investment in the Japanese stock market. On August 30, 2020, his 90th birthday, Warren Buffett first publicly disclosed that he held approximately 5% of the shares in each of Japan's five largest trading companies, with a total investment value of about $6.3 billion at the time. Five years later, with rising stock prices and continued investment, the total market value of Buffett's holdings in Japan's five largest trading companies has exceeded $31 billion. In 2022-2023, the yen fell to a near 30-year low, and Japanese equity assets as a whole suffered significant losses. For value investors, this presented a classic opportunity: cheap assets, stable profits, high dividends, and the possibility of a currency reversal… This investment opportunity was extremely attractive. Bitcoin and Gold Aside from the stock market, how much does the appreciation of the Japanese yen affect gold and Bitcoin? The pricing logic for gold has always been simple: a weaker dollar leads to higher gold prices; lower real interest rates lead to higher gold prices; increased global risk leads to higher gold prices. Each of these is directly or indirectly related to a turning point in Japan's interest rate policy. Firstly, rising Japanese interest rates mean a stronger yen, and the yen accounts for a significant 13.6% of the US Dollar Index (DXY). A stronger yen puts direct pressure on the DXY (Japanese dollar index). When the dollar weakens, gold naturally loses its biggest suppressive force, making it easier for prices to rise. Secondly, the reversal in Japanese interest rates marks the end of the "global cheap money" boom of the past decade. Yen carry trades are starting to flow back, Japanese institutions are reducing overseas investments, and global liquidity is declining. During a liquidity contraction cycle, funds tend to withdraw from highly volatile assets and turn to gold, a "settlement asset, safe-haven asset, and risk asset without counterparties." Thirdly, if Japanese investors reduce their purchases of gold ETFs due to rising domestic interest rates, the impact will be limited, as the main drivers of global gold demand are not Japan, but rather central bank gold purchases, ETF holdings, and the long-term upward trend in purchasing power in emerging markets. Therefore, the impact of this round of Japanese yield surge on gold is clear: Short-term fluctuations are possible, but the medium- to long-term outlook remains bullish. Gold is once again in a favorable combination of "interest rate sensitivity + weakening dollar + rising safe-haven demand," and the long-term outlook is positive. Unlike gold, Bitcoin is arguably the most liquid risk asset globally, trading 24/7 and highly correlated with the Nasdaq. Therefore, when Japanese interest rates rise, the yen flows back into the country, and global liquidity contracts, Bitcoin is often one of the first assets to fall. It is exceptionally sensitive to the market, acting like a "liquidity electrocardiogram." However, short-term bearishness does not equate to long-term pessimism. Japan entering a rate hike cycle means higher global debt costs, increased volatility in US Treasury bonds, and rising fiscal pressure on various countries. Against this macroeconomic backdrop, assets "without sovereign credit risk" are being revalued: in traditional markets it's gold, and in the digital world it's Bitcoin. Therefore, Bitcoin's path is clear: in the short term, it falls with risk assets, but in the medium term, it receives new macroeconomic support due to rising global credit risk. In short, the era of risk assets booming with "free Japanese funding" over the past decade is over. The global market is entering a new interest rate cycle—a more realistic and brutal one. From stocks and gold to Bitcoin, no asset remains unaffected. When liquidity recedes, assets that hold their ground are more valuable. During cyclical shifts, understanding the hidden financial chains is the most crucial skill. The curtain has risen on a new world. Now, it's a matter of who adapts fastest.
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