The era of extreme monetary easing in Japan over the past decade is being permanently written into history.

Written by: Liam, Deep Tide TechFlow

Let me tell you a ghost story:

The yield on Japan's two-year government bonds has risen above 1% for the first time since 2008; the five-year bond yield increased by 3.5 basis points to 1.345%, a new high since June 2008; the 30-year bond yield briefly touched 3.395%, setting a historical record.

The significance of this event is not just that "interest rates have broken 1%," but rather:

The era of extreme monetary easing in Japan over the past decade is being permanently written into history.

From 2010 to 2023, Japan's two-year government bond yield has mostly wandered between -0.2% and 0.1%. In other words, previously, money in Japan was essentially free or even subsidized for borrowing.

This was due to Japan's economy being trapped in a deflationary spiral of stagnant prices, stagnant wages, and weak consumption since the bubble burst in 1990. To stimulate the economy, the Bank of Japan adopted the most aggressive and extreme monetary policies in the world, including zero and even negative interest rates, making funds as cheap as possible. Borrowing money was almost free, and depositing money in banks would incur costs, forcing everyone to invest and consume.

Now, with Japan's bond yields turning positive overall, rising to 1%, it not only concerns Japan itself but also affects the world in at least three ways:

First, it represents a complete shift in Japan's monetary policy.

The era of zero interest rates, negative interest rates, and YCC (Yield Curve Control) has ended. Japan is no longer the only major economy in the world maintaining "extremely low interest rates," and the era of easing has been completely terminated.

Second, it changes the global pricing structure of funds.

In the past, Japan was one of the largest overseas investors globally (especially pension funds like GPIF, insurance companies, and banks). This was due to domestic interest rates being too low, prompting Japanese companies to invest heavily overseas, directing funds to the U.S., Southeast Asia, and China. Now, as domestic interest rates rise, the "outbound motivation" for Japanese funds will decrease, and they may even shift back to Japan.

Finally, and this is the point traders are most concerned about, a 1% rise in Japanese interest rates means that the funding chain that relied on Japanese carry trade over the past decade will experience systemic contraction.

This will impact U.S. stocks, Asian stock markets, foreign exchange markets, gold, Bitcoin, and even global liquidity.

Because carry trading is the invisible engine of global finance.

The End of Yen Carry Trade

Over the past decade, the continuous rise of global risk assets like U.S. stocks and Bitcoin can be attributed to yen carry trade.

Imagine borrowing money in Japan is almost free.

You borrow 100 million yen in Japan at an interest rate of only 0% to 0.1%, then convert that 100 million yen into U.S. dollars to buy bonds yielding 4% or 5%, or invest in stocks, gold, or Bitcoin, and finally convert it back to yen to repay the loan.

As long as there is an interest rate differential, you make money; the lower the interest rate, the more you can arbitrage.

There is no publicly available precise figure, but global institutions generally estimate that the scale of yen carry trade is between 1 to 2 trillion dollars at the low end and 3 to 5 trillion dollars at the high end.

This is one of the largest and most invisible sources of liquidity in the global financial system.

Many studies even suggest that yen carry trade is one of the true driving forces behind the record highs of U.S. stocks, gold, and BTC over the past decade.

The world has been using "Japan's free money" to elevate risk assets.

Now that Japan's two-year government bond yield has risen to 1% for the first time in 16 years, it means that this "free money pipeline" has been partially shut off.

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 starting to flow back, especially Japanese life insurance, banks, and pension funds, which will reduce their allocation to overseas assets.

Global funds are beginning to withdraw from risk assets; a stronger yen often indicates a decline in global market risk appetite.

What is the Impact on the Stock Market?

The bull market in U.S. stocks over the past decade has been driven by the influx of cheap global funds, with Japan being one of the largest pillars.

The rise in Japanese interest rates directly hinders a large amount of capital from flowing into the U.S. stock market.

**Especially given the current extremely high valuations of U.S. stocks and skepticism surrounding AI themes, any withdrawal of liquidity could amplify the potential for a **correction.

The entire Asia-Pacific stock market is also affected; markets in South Korea, Taiwan, and Singapore have also benefited from yen carry trade in the past.

As Japanese interest rates rise, funds will start to flow back to Japan, increasing short-term volatility in Asian stock markets.

For the Japanese stock market itself, the rise in domestic interest rates will also put short-term pressure on the stock market, especially for companies heavily reliant on exports. However, in the long run, normalizing interest rates will help the economy escape deflation, re-enter a growth phase, and rebuild the valuation system, which is actually a positive development.

This may also be the reason why Buffett continues to increase his investments in the Japanese stock market.

On August 30, 2020, Buffett publicly disclosed for the first time that he held about 5% of shares in Japan's five major trading companies on his 90th birthday, with an initial investment value of approximately $6.3 billion.

Five years later, with rising stock prices and continued investments, the total market value of Buffett's holdings in Japan's five major trading companies has surpassed $31 billion.

In 2022-2023, as the yen fell to nearly a 30-year low, Japanese equity assets were overall "discounted." For value investors, this represents a typical investment opportunity: assets are cheap, profits are stable, dividends are high, and the exchange rate may reverse… such an investment opportunity is very attractive.

Bitcoin and Gold

Aside from the stock market, what is the impact of yen appreciation on gold and Bitcoin?

The pricing logic of gold has always been simple:

Weak dollar, rising gold prices; declining real interest rates, rising gold prices; increasing global risks, rising gold prices.

Each of these is directly or indirectly related to the turning point in Japan's interest rate policy.

First, the rise in Japanese interest rates means yen appreciation, and the yen accounts for as much as 13.6% of the U.S. dollar index (DXY). A stronger yen directly puts pressure on the DXY; when the dollar weakens, gold naturally loses its greatest suppressive force, making it easier for prices to rise.

Second, the reversal of Japanese interest rates marks the end of the "global cheap funds" era of the past decade. Yen carry trade is starting to flow back, and Japanese institutions are reducing overseas investments, leading to a decline in global liquidity. During a liquidity contraction cycle, funds tend to withdraw from high-volatility assets and move towards gold, which is seen as a "settlement asset, safe-haven asset, and asset with no counterparty risk."

Third, if Japanese investors reduce their purchases of gold ETFs due to rising domestic interest rates, this impact will be limited because the main drivers of global gold demand are not in Japan but in central bank purchases, ETF increases, and the long-term rising purchasing power of emerging markets.

Therefore, the impact of this round of rising Japanese yields on gold is clear:

There may be short-term volatility, but the medium to long-term outlook remains bullish.

Gold is back in a favorable combination of "interest rate sensitivity + dollar weakening + rising safe-haven demand," and the long-term outlook is positive.

Unlike gold, Bitcoin is considered the most liquid risk asset globally, traded around the clock and highly correlated with the Nasdaq. Therefore, when Japanese interest rates rise, yen carry trade flows back, and global liquidity contracts, Bitcoin is often one of the first assets to decline; it is exceptionally sensitive to the market, acting like a "liquidity ECG" of the market.

However, a short-term downturn does not equate to long-term pessimism.

Japan entering a rate hike cycle means rising global debt costs, increased volatility in U.S. Treasuries, and rising fiscal pressures in various countries. In this macro context, assets with "no sovereign credit risk" are being re-evaluated: in traditional markets, it is gold, while in the digital world, it is Bitcoin.

Thus, the path for Bitcoin is also clear: short-term declines alongside risk assets, but in the medium term, it will receive new macro-level support due to rising global credit risks.

In summary, the era of risk assets thriving on "Japan's free money" over the past decade has come to an end.

The global market is entering a new interest rate cycle, a more realistic and harsher cycle.

From stocks to gold to Bitcoin, no asset can remain unaffected.

When liquidity recedes, assets that can stand firm become more valuable. During a cycle transition, understanding that hidden funding chain is the most important skill.

The curtain on the new world has already been raised.

Next, it will be about who adapts faster.

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