Japan's government bond markets are experiencing one of the most significant reassessments in their history.

The impact can extend much further than domestic bond investments and spread to global riskier asset classes, including Bitcoin.

Tightening liquidity increases pressure on yen carry trade activities

Japan's government bond (JGB) yields have risen sharply since the beginning of 2026. The 10-year yield has climbed to around 2.12 percent, the highest level since 1999, and the 30-year yield has risen nearly to an all-time high of 3.5 percent.

In total, rates have risen by an estimated 104 to 120 basis points, which is a rare change in Japan's long period of low interest rates.

Behind the reassessment is concern over the sustainability of Japan's public finances and monetary policy stance. The government recently approved a record $780 billion budget for 2026. This has raised worries about the growing deficit as inflationary pressures are no longer just theoretical.

The ongoing weakness of the yen has increased doubts about whether the Bank of Japan (BoJ) will manage inflationary developments after this.

Analysts at Kobeissi Letter consider this one of the most dramatic reassessments of Japan's bond market in history. They note that losses are accelerating as investors incorporate increasing deficit spending and political uncertainty into prices.

For decades, Japan's bond markets have been characterized by stability and a strong role for the central bank. Now this assumption is being challenged.

At the same time, there are genuine signs of liquidity contraction. Market commentator Money Ape warned that Japan's liquidity is "drying up quickly." He pointed out that the amount of cash in circulation fell by 4.9% in 2025 – the first decline in 18 years.

For a system based on liquidity, this change is significant.

The unwinding of the yen carry trade poses a slowly advancing risk to Bitcoin and cryptocurrencies.

This tightening development raises concerns about the future of the global yen carry trade investment strategy, which has been the foundation of international risk-taking for years. Investors have long borrowed cheaply in yen to finance higher-yielding investments in equities, emerging markets, and cryptocurrencies.

As interest rates rise in Japan and financial conditions tighten, these investments are becoming increasingly vulnerable to forced liquidation.

RadarHits noted that the rise in the 30-year yield to record levels exerts direct pressure on carry trades.

"Japan's 30-year yield rises to 3.5%, the highest level on record. Pressure on carry trades is increasing," they wrote.

If the pace of unwinding accelerates, risk assets that have benefited from yen-funded liquidity, including Bitcoin, may face increased volatility.

Some experts estimate that the risk lies in how slowly the pressure accumulates. For example, JustDario described the situation as a "boiling frog phenomenon," where structural pressure gradually increases so that investors do not react until instability is inevitable.

In this perspective, Japan's financial system – which is the basis of the global JPY carry trade – is deteriorating in real time, even though the crisis has not yet fully materialized.

However, the picture is not one-sided. Despite higher nominal interest rates, Japan's real interest rates remain negative, which continues to support liquidity and risk-taking.

Capital Flows emphasized that this very dynamic explains why Japanese stocks remain close to their all-time highs and why international capital continues to flow into Japan's markets.

"This means that there is a massive amount of liquidity in their markets. Did you think the Fed was being accommodative? It's nothing compared to the BoJ," the analyst wrote.

This paradox, where signs of tightening appear alongside negative real interest rates, makes the outlook difficult. The risk is more about whether a prolonged unwinding of carry trades could gradually remove an important component from global liquidity than about a sudden shock.

In January 2026, Japan's interest rates are still volatile and unstable. It is significant for both the macro environment of Bitcoin and Japan's markets whether the BoJ succeeds in managing a soft landing or whether pressure on the bond market causes broader economic disruptions in the coming months.