Japan's two-year government bond yield reached 1.746% on Monday, marking its highest level in more than 31 years. This rise increases the cost of the yen carry trade, a strategy that has historically helped fund global risk assets, including Bitcoin (BTC).
The movement in two-year yields reflects trader expectations for the Bank of Japan (BOJ). Swap markets currently price approximately 88% odds of a rate increase in September. The BOJ raised its policy rate to 1% in June, the highest level since 1995, with longer maturities following suit. The 10-year Japanese government bond (JGB) yield now sits near 2.93%.
Typically, higher interest rates support a currency, yet the yen has weakened. It traded at 160.16 per dollar on Friday and touched 160.20 again on Monday. Between July 30 and August 26, Tokyo deployed 15.4 trillion yen, close to $97 billion, to support the currency. This included a rare joint intervention with the United States on July 31. Despite these efforts, the currency has lost over half of its value recovered from those actions.
The gap between US and Japanese two-year yields has shrunk to 2.64%. At its peak in 2023 and 2024, that difference was close to 5%, meaning half of the carry incentive has vanished. For four decades, the yen tracked this spread closely, but the two have now separated. The currency continues to weaken even as the reward for borrowing yen shrinks.
This divergence suggests that interest rates are no longer the main driver of the yen's value. Mounting Japanese bond losses and heavy debt issuance point to a confidence problem that higher rates alone cannot solve. Investors typically borrow yen at low rates to buy higher-yielding assets abroad. Sharp appreciation of the yen makes those loans more expensive to repay, which can trigger forced selling.
August 2024 illustrated this mechanism when Bitcoin and Ethereum lost as much as 20% as yen-funded positions closed. Bitcoin currently trades at $79,087, up 1.3% over 24 hours. The token had slipped below $77,000 last week following hawkish remarks from Federal Reserve chair Kevin Warsh.
The upcoming September BOJ decision matters less as a potential shock than as a marker of market sentiment. A move priced at 88% odds is largely absorbed by traders. Meanwhile, the underlying position that has yet to unwind continues to build.