What Japan’s 1% Yield Means for Bitcoin, Gold, and Global Liquidity

Japan’s two-year government bond yield has climbed above 1% for the first time since 2008. The five-year yield rose 3.5 basis points to 1.345%, a level last seen in June 2008, while the 30-year yield briefly touched 3.395%, marking a record high.

This development represents more than a simple crossing of the 1% threshold. It marks the end of Japan's ultra-accommodative monetary policy era, one of the most prolonged periods of monetary easing among developed economies over the past decade.

Between 2010 and 2023, Japan's two-year government bond yield remained within a narrow band of negative 0.2% to positive 0.1%. During this period, borrowing costs in Japan were negligible, and the government at times issued debt at negative yields, effectively compensating investors for lending to the state.

This shift has its origins in Japan's prolonged economic stagnation following the collapse of its asset bubble in the early 1990s. For over three decades, the economy remained mired in deflation, characterized by stagnant prices, flat wage growth, and subdued consumer spending. To stimulate economic activity, the Bank of Japan implemented the world's most aggressive monetary accommodation framework, including zero interest rates and subsequently negative rates. This policy environment made borrowing virtually cost-free while imposing implicit costs on cash holdings, aimed at incentivizing households and businesses to increase investment and consumption.

Japanese government bond yields have now exited negative territory and risen to approximately 1%. This transition carries significant implications not only for Japan but for global financial markets, with effects evident across three key dimension

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

The era of zero rates, negative rates, and yield curve control has concluded. Japan is no longer an outlier among major economies maintaining ultra-accommodative monetary conditions. This marks the formal end of an exceptional period of monetary policy experimentation.

Second, it recalibrates the global cost of capital.

Historically, Japan has served as one of the world's largest sources of cross-border capital flows, driven predominantly by institutional investors including the Government Pension Investment Fund (GPIF), major insurance companies, and domestic banks. With domestic yields near zero, Japanese investors faced strong incentives to seek returns abroad, directing substantial capital flows into the United States, Southeast Asia, and China. However, as domestic yields rise, the rationale for overseas investment weakens. In certain instances, capital may repatriate to Japan as domestic assets become more attractive.

Perhaps most significant for global financial markets is the structural implication: a shift in Japanese interest rates to 1% represents a fundamental tightening of the global carry trade that has underpinned market dynamics for the past decade.

The impact spans U.S. equities, Asian equity markets, currencies, gold, Bitcoin, and global liquidity more broadly.

The carry trade has functioned as a critical, though often underappreciated, pillar of global financial architecture.

TLDR:

The Unwinding of the Yen Carry Trade

For over a decade, the yen carry trade has served as a significant, yet often overlooked, driver of global risk asset appreciation, supporting price gains across markets ranging from U.S. equities to Bitcoin.

The underlying mechanism is simple: borrowing costs in Japan were negligible.

Consider an investor securing a ¥100 million loan in Japan at 0 to 0.1% interest. By converting these funds into U.S. dollars and investing in U.S. Treasuries yielding 4 to 5%, or alternatively allocating capital to equities, commodities, or digital assets, the investor captures the interest rate differential. Upon maturity, the proceeds are converted back to yen to repay the original loan.

The strategy remains profitable as long as the interest rate differential persists and currency fluctuations do not offset the yield advantage. The lower Japan's borrowing costs, the more compelling and widely adopted this approach becomes.

While no official data exists, global financial institutions estimate the total size of the yen carry trade at between $1–2 trillion on the conservative end and $3–5 trillion at the upper bound.

This positions it as one of the largest, yet least transparent, sources of liquidity within the global financial system.

Research from multiple financial institutions suggests that the yen carry trade has been a significant contributing factor behind the sustained appreciation of U.S. equities, gold, and Bitcoin over the past decade. Essentially, global investors have leveraged Japan's low-cost funding environment to increase exposure to risk assets.

With Japan's two-year government bond yield now reaching 1% for the first time in 16 years, a portion of this low-cost funding channel is contracting.

The implications are clear:

International investors face higher borrowing costs in yen, reducing the attractiveness of carry trade strategies and creating headwinds for global equity markets.

Simultaneously, Japanese capital is showing signs of repatriation. Institutional investors, including life insurance companies, banks, and pension funds, are expected to reduce their foreign asset allocations in favor of more competitive domestic yields.

As capital retreats from risk assets, yen appreciation typically serves as an indicator of diminishing risk appetite across global markets.

Implications for Global Equity Markets

The sustained rally in U.S. equities over the past decade has been supported in part by abundant global liquidity, with Japan representing one of the most significant sources of capital inflows. Rising Japanese interest rates directly constrain this funding channel into U.S. equity markets.

This development coincides with a period of elevated vulnerability: U.S. equity valuations remain at historically high levels, while the artificial intelligence investment thesis faces increasing scrutiny. Any meaningful reduction in liquidity could exacerbate downside price movements.

The effects extend throughout the Asia-Pacific region. Markets including South Korea, Taiwan, and Singapore have also attracted substantial yen-denominated carry trade capital over the past decade. As Japanese rates normalize and capital flows reverse course, heightened volatility in Asian equity markets appears increasingly probable in the near term.

For Japan's domestic equity market, rising interest rates will likely exert near-term pressure, particularly on export-oriented sectors. However, over the longer term, the normalization of interest rates may enable Japan to exit its deflationary environment, restore sustainable growth, and establish a more rational equity valuation framework. From this perspective, the transition represents a fundamentally positive development.

This may partly explain Warren Buffett's sustained commitment to Japanese equities.

On August 30, 2020 (his 90th birthday), Buffett disclosed that Berkshire Hathaway had acquired approximately 5% stakes in each of Japan's five major trading companies (sogo shosha), representing an initial investment of approximately $6.3 billion.

Five years later, driven by share price appreciation and additional purchases, Berkshire's holdings in these five trading companies have grown to exceed $31 billion in market value.

During 2022–2023, as the yen depreciated to levels not seen in nearly three decades, Japanese equities traded at significant discounts to historical valuations. For value-oriented investors, the conditions were compelling: undervalued assets, stable corporate profitability, attractive dividend yields, and a currency with substantial appreciation potential. Such convergence of favorable factors is relatively uncommon.

Bitcoin and Gold

Beyond equity markets, the critical question becomes: how does yen appreciation affect gold and Bitcoin?

Gold's price dynamics have historically responded to three primary drivers:

• U.S. dollar weakness supports higher gold prices

• Declining real interest rates support higher gold prices

• Increased global risk aversion supports higher gold prices

Each of these factors is influenced, directly or indirectly, by Japan's monetary policy trajectory.

First, rising Japanese interest rates typically result in yen appreciation. Within the U.S. Dollar Index (DXY), the yen represents a 13.6% weighting, the second-largest component after the euro. Consequently, yen strength exerts downward pressure on the DXY. When the dollar weakens, a primary constraint on gold prices diminishes, creating conditions for appreciation.

Second, Japan's monetary policy reversal marks the conclusion of over a decade of exceptionally accommodative global monetary conditions. As yen carry trades unwind and Japanese institutional investors reduce foreign asset allocations, global liquidity conditions tighten. During periods of liquidity contraction, capital typically migrates from high-volatility assets toward gold, which serves as a settlement asset, safe-haven instrument, and bearer of zero counterparty risk.

Third, while higher domestic yields may moderately reduce Japanese investor demand for gold ETFs, this effect is unlikely to be material. Japan does not constitute a primary source of global gold demand. The dominant forces remain central bank reserve accumulation, ETF flows in developed Western markets, and secular growth in emerging market purchasing power.

The aggregate implications of rising Japanese yields for gold are relatively clear: near-term volatility is possible, but the medium- to long-term trajectory appears constructive.

Gold benefits from a confluence of supportive factors: sensitivity to falling real rates, potential dollar weakness, and sustained demand for safe-haven assets.

Unlike gold, Bitcoin functions as one of the world's most liquid risk assets, trading continuously and exhibiting high correlation with technology-heavy equity indices such as the Nasdaq. Consequently, when Japanese interest rates rise, yen-funded carry trades unwind, and global liquidity conditions tighten, Bitcoin frequently experiences among the sharpest initial price declines. Its sensitivity to liquidity shifts makes it function as a near-real-time indicator of global capital flows.

However, near-term weakness should not be conflated with a deteriorating long-term outlook.

Japan's transition toward a tightening monetary cycle elevates global borrowing costs, increases volatility in government bond markets, and intensifies fiscal constraints across major economies. Within this macroeconomic framework, assets without sovereign credit risk undergo fundamental revaluation. In traditional financial markets, gold serves this role. In digital asset markets, Bitcoin occupies an analogous position.

Consequently, Bitcoin's outlook follows a relatively clear pattern: near-term declines may occur in tandem with broader risk asset weakness, but medium-term prospects are supported by increasing demand for assets without sovereign credit exposure as global fiscal pressures mount.

TLDR:

Conclusion

The era of risk asset appreciation fueled by Japan's ultra-accommodative monetary policy has concluded.

Global markets are transitioning into a normalized interest rate environment. This environment is characterized by greater discipline but also heightened selectivity. Across equities, commodities, and digital assets, no sector remains immune to these structural shifts.

As liquidity conditions tighten, assets with fundamental resilience become increasingly valuable. In periods of regime change, understanding the underlying architecture of capital flows becomes a critical analytical advantage.

This transition is already underway. The determining factor will be the speed of adaptation.