Japan's two-year government bond yield climbed to 1.746% on Monday, its highest level in more than 31 years, raising the cost of the yen carry trade that has helped fund global risk assets, including Bitcoin. The move comes as swap markets price roughly 88% odds of a Bank of Japan rate increase in September, and it puts the crypto market on alert for a repeat of the August 2024 selloff, when Bitcoin and Ethereum lost as much as 20% as yen-funded positions closed.
The yield climb
The two-year JGB yield has been grinding higher for weeks. The Bank of Japan lifted its policy rate to 1% in June, the highest since 1995, and the 10-year yield now sits near 2.93%. Swap markets are pricing an 88% chance of another hike in September. That's a lot of tightening already in the pipeline, and it's showing up in the short end of the curve.
Why the yen isn't rallying
Here's the odd part: the yen is weaker, not stronger. It traded at 160.16 per dollar on Friday and touched 160.20 again on Monday. Tokyo spent 15.4 trillion yen (close to $97 billion) between July 30 and August 26, including a rare joint intervention with the United States on July 31. The yen has already surrendered more than half of the gains from that intervention.
For four decades, the yen tracked the US-Japan yield spread closely. That relationship has broken down. The spread between US and Japanese two-year yields has narrowed to 2.64%, down from a peak of close to 5% in 2023-2024. Yet the yen keeps sliding. That divergence points away from interest rates as the main driver. Mounting Japanese bond losses and heavy debt issuance suggest a confidence problem that higher rates alone cannot solve.
The carry trade's ticking clock
The carry trade is simple: investors borrow yen cheaply, then buy higher-yielding assets abroad. A sharp yen appreciation makes those loans costlier to repay, potentially forcing selling. In August 2024, Bitcoin and Ethereum lost as much as 20% as yen-funded positions closed. Last week, Bitcoin slipped below $77,000 on hawkish remarks from Federal Reserve chair Kevin Warsh. The market is already jittery.
September's real test
The September BOJ decision matters less as a shock than as a marker. A move priced at 88% odds is largely absorbed. The real risk is the carry trade position that has yet to unwind. It keeps building. If the yen suddenly strengthens, the forced selling could hit crypto hard. That's the scenario traders are watching.
