Japan Ends Zero Interest Rates: The "Liquidity Turning Point" That Risk Assets Fear Has Arrived

Original Title: "Japanese Government Bond Yields Break 1%, the 'Ghost Story' of Global Financial Markets Begins"

Original Author: Liam, Deep Tide TechFlow

Let me tell you a ghost story:

Japan’s two-year government bond yield has risen above 1% for the first time since 2008; the five-year bond yield rose 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 "the yield broke 1%," but rather:

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

From 2010 to 2023, Japan’s two-year government bond yield hovered almost constantly between -0.2% and 0.1%. In other words, money in Japan was previously lent to you for free or even with a negative interest rate.

This was due to Japan’s economy falling into a deflationary trap of stagnant prices, stagnant wages, and weak consumption after the bubble burst in 1990. To stimulate the economy, the Bank of Japan implemented the world’s most aggressive and extreme monetary policies—zero interest rates and even negative interest rates—making capital as cheap as possible. Borrowing money was almost free, and depositing money in the bank would actually cost you, all to force people to invest and consume.

Now, with Japanese government bond yields turning positive and rising to 1%, the impact goes beyond Japan itself and affects the world in at least three ways:

First, it signifies a complete shift in Japan’s monetary policy.

Zero interest rates, negative interest rates, and YCC (Yield Curve Control) have ended. Japan is no longer the only major economy maintaining "ultra-low interest rates," and the era of monetary easing has been completely terminated.

Second, it also changes the global capital price structure.

In the past, Japan was one of the world’s largest overseas investors (especially pension fund GPIF, insurance companies, and banks) because domestic interest rates were too low. To pursue higher yields, Japanese companies invested heavily abroad, channeling funds to the US, Southeast Asia, and China. Now, as domestic interest rates rise, the "outbound drive" of Japanese capital will decrease, and funds may even shift back from overseas to Japan.

Finally, and most importantly for traders, a 1% rise in Japanese interest rates means that the global carry trade chain, which has relied on Japanese arbitrage for the past 10 years, will experience systemic contraction.

This will impact US stocks, Asian stock markets, forex markets, gold, bitcoin, and even global liquidity.

Because carry trade is the hidden engine of global finance.

The Gradual End of Yen Carry Trade

Over the past decade, the continuous rise of global risk assets such as US stocks and bitcoin has been driven in large part by the yen carry trade.

Imagine being able to borrow money in Japan almost for free.

You borrow 100 millions yen in Japan at an interest rate of only 0%~0.1%, then exchange this 100 millions yen for US dollars to buy US Treasury bonds yielding 4% or 5%, or to buy stocks, gold, or bitcoin, and finally convert it back to yen to repay the loan.

As long as the interest rate differential exists, you make money—the lower the rate, the more arbitrage opportunities.

There is no precise public figure, but global institutions generally estimate the scale of yen carry trade at between 1~2 trillions USD on the low end and 3~5 trillions USD on the high end.

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

Many studies even believe that yen carry trade is one of the real driving forces behind the repeated record highs in US stocks, gold, and BTC over the past decade.

The world has been using "Japan’s free money" to push up risk assets.

Now, with Japan’s two-year government bond yield rising to 1% for the first time in 16 years, 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.

Japanese domestic funds are also starting to flow back home, especially Japanese life insurers, banks, and pension funds, which will reduce their allocation to overseas assets.

Global capital is beginning to withdraw from risk assets. Whenever the yen strengthens, it often signals a decline in global market risk appetite.

What Is the Impact on Stock Markets?

The US stock bull market over the past 10 years was driven by a flood of cheap global capital, with Japan as one of the biggest pillars.

Rising Japanese interest rates directly hinder the inflow of large amounts of capital into the US stock market.

Especially now, with US stock valuations extremely high and the AI theme under scrutiny, any liquidity withdrawal could amplify corrections.

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

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

As for the Japanese stock market itself, rising domestic interest rates will also put short-term pressure on stocks, especially for companies heavily reliant on exports. But in the long run, normalization of interest rates will help the economy escape deflation, re-enter a growth phase, and rebuild valuation systems, which is actually positive.

This may also be why Buffett continues to increase his investment in Japanese stocks.

Buffett first publicly disclosed on August 30, 2020—his 90th birthday—that he held about 5% of each of Japan’s five major trading companies, with a total investment of about $6.3 billions at the time.

Five years later, as stock prices have risen and he has continued to add to his holdings, the total market value of Buffett’s holdings in the five major Japanese trading companies has exceeded $31 billions.

In 2022–2023, as the yen fell to a nearly 30-year low, Japanese equity assets were "deeply discounted" overall. For value investors, this is a classic opportunity: cheap assets, stable profits, high dividends, and the possibility of a currency reversal... Such investment opportunities are too attractive.

Bitcoin and Gold

Aside from stocks, what is the impact of yen appreciation on gold and bitcoin?

The pricing logic of gold has always been simple:

Weak dollar, gold price rises; real interest rates fall, gold price rises; global risk rises, gold price rises.

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

First, rising Japanese interest rates mean yen appreciation, and in the US Dollar Index (DXY), the yen accounts for as much as 13.6%. A stronger yen directly puts pressure on the DXY. When the dollar weakens, gold naturally loses its biggest suppressing force and its price is more likely to rise.

Second, the reversal of Japanese interest rates marks the end of "global cheap money" over the past decade. Yen carry trades begin to flow back, Japanese institutions reduce overseas investment, and global liquidity declines. In a liquidity contraction cycle, capital is more likely to withdraw from high-volatility assets and turn to gold, which is a "settlement asset, safe-haven asset, and asset with no counterparty risk".

Third, if Japanese investors reduce purchases of gold ETFs due to higher domestic interest rates, the impact is limited, since the main drivers of global gold demand are not in Japan but in central bank gold purchases, ETF inflows, and the long-term upward trend in emerging market purchasing power.

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 once again in a favorable combination of "interest rate sensitivity + dollar weakening + rising risk aversion," and the long-term outlook is positive.

Unlike gold, bitcoin is considered the world’s most liquid risk asset, trading around the clock and highly correlated with the Nasdaq. Therefore, when Japanese interest rates rise, yen carry trades flow back, and global liquidity contracts, bitcoin is often one of the first assets to fall. It is extremely sensitive to the market, like a "liquidity ECG" for the market.

But short-term bearishness does not mean long-term pessimism.

Japan entering a rate hike cycle means global debt costs rise, US Treasury volatility increases, and fiscal pressures mount in various countries. In this macro environment, assets with "no sovereign credit risk" are being revalued: in traditional markets, that’s gold; in the digital world, it’s bitcoin.

Therefore, the path for bitcoin is also clear: short-term declines with risk assets, but in the medium term, new macro-level support emerges as global credit risk rises.

In short, the era of risk assets thriving on "Japan’s free money" over the past decade is over.

The global market is entering a new interest rate cycle—a more realistic and also more brutal cycle.

From stocks to gold to bitcoin, no asset is immune.

When liquidity recedes, the assets that can stand firm are more valuable. When the cycle shifts, understanding the hidden capital chain is the most important skill.

The curtain has already risen on the new world.

Next, it’s all about who adapts faster.