Japan's bond yields hit a new high since 2008, impacting global arbitrage trading, while Crypto Assets face liquidity pressure.

The yield on Japan's 10-year government bonds has risen to 1.86%, reaching a new high since 2008, and causing global market turbulence. With the Bank of Japan hinting that it will consider an interest rate hike at the December meeting, the long-maintained low interest rate era may come to an end, directly threatening the support for yen carry trade in global risk assets and the crypto market.

In the past year, Japan's government bond yields have nearly doubled, with the two-year yield reaching 1% for the first time since 2008. Although 1.86% is still considered low globally, this represents a significant structural change for Japan, a long-time “zero interest rate country.” Low interest rates have allowed global investors to borrow yen at very low costs, pouring into U.S. bonds, European bonds, and high-risk assets, including crypto market. However, as domestic yields rise, funds may begin to flow back to Japan.

Japan holds about 1.1 trillion USD in U.S. Treasury bonds, making it the largest foreign creditor of the United States. As Japanese yields rise and the attractiveness of overseas assets declines, coupled with a U.S. fiscal deficit of 1.8 trillion USD and a surge in bond issuance, the risk of capital return puts pressure on the U.S. bond market.

The crypto market has also been impacted simultaneously. On Sunday, crypto assets fell across the board, and analysts pointed out a correlation between the reduction of yen arbitrage funds and market sell-offs. Assets like Bitcoin perform best in a loose policy and low interest rate environment, while the contraction of yen arbitrage trading signifies a decrease in speculative funds. DeFi analyst Wukong stated that crypto is at the top of the risk chain, and even minor changes in liquidity could trigger severe fluctuations.

The Japanese stock market also faced a sell-off on Monday, with the Nikkei 225 dropping nearly 950 points, a decline of 1.89%. Meanwhile, the yen strengthened to the range of 155.59–156.61. The Governor of the Bank of Japan, Kazuo Ueda, warned that delaying interest rate hikes could lead to inflation and policy confusion.

As Japan moves towards interest rate normalization, the global arbitrage trading chain is being repriced, and the crypto market may continue to face risks of liquidity tightness and increased volatility in the coming weeks.