Japan bids farewell to zero interest rates: Has the "Liquidity turning point" for risk assets arrived?

The yield on Japan's two-year government bonds has risen to 1% for the first time since 2008; the yield on five-year government bonds increased by 3.5 basis points to 1.345%, a new high since June 2008; the yield on 30-year government bonds briefly touched 3.395%, setting a historical peak.
The significance of this matter is not just "Interest Rate surpassing 1%", but rather:
The extreme easing period in Japan over the past decade is being permanently written into history.
From 2010 to 2023, the yield on Japan's two-year government bonds has almost always hovered between -0.2% and 0.1%. In other words, money in Japan used to be free or even subsidized for borrowing.
This is due to the fact that Japan's economy has been trapped in a deflationary cycle of stagnant prices, stagnant wages, and weak consumption since the bubble burst in 1990. In order to stimulate the economy, the Bank of Japan has implemented the most aggressive and extreme monetary policy in the world, including zero interest rates and even negative interest rate policies, making funds as cheap as possible. Borrowing money is almost free, and keeping money in the bank actually incurs a cost, thus forcing everyone to invest and consume.
Currently, Japan's government bond yields have shifted from negative to positive, rising to 1%. This not only concerns Japan itself but also affects the world in at least three aspects: first, it represents 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 in the world maintaining "ultra-low interest rates". The era of monetary easing has been completely brought to an end.
Secondly, it has also changed the global capital price structure.
In the past, Japan was one of the world's largest overseas investors (especially pension funds like GPIF, insurance companies, and banks). This was due to the domestic interest rates being too low; to pursue higher yields, Japanese companies invested heavily overseas, directing funds to the United States, Southeast Asia, and China. Now, as domestic interest rates rise, the "outbound momentum" of Japanese capital will decrease, and there may even be a shift of funds back to Japan from overseas.
Finally, the most concerning point for traders is that the rise of Japan's Interest Rate by 1% means that the capital chain leveraged by carry trade in Japan over the past 10 years will experience a systematic contraction.
This will affect the US stock market, Asian stock markets, foreign exchange markets, gold, Bitcoin, and even global Liquidity.
Because arbitrage trading (Carry Trade) is the invisible engine of the global finance.
Yen arbitrage is gradually being terminated.
In the past decade or so, one important reason for the continuous rise of global risk assets such as US stocks and Bitcoin is the Yen Carry Trade (Yen Carry Trade )).
Imagine the money you borrowed in Japan is almost free.
Borrowing 100 million yen in Japan, with an interest rate of only 0% to 0.1%, and then converting that 100 million yen into US dollars to buy US Treasury bonds with yields of 4% or 5%, or invest in stocks, gold, or Bitcoin, and finally converting back to yen to repay the loan. As long as there is a rate difference, you make money; the lower the interest rate, the more arbitrage you can achieve. There is no publicly available precise figure, but global institutions generally estimate that the scale of yen arbitrage is between 1 to 2 trillion US dollars at the low end and 3 to 5 trillion US dollars at the high end. This is one of the largest and most hidden sources of Liquidity in the global financial system.
Many studies even believe that yen arbitrage is one of the real driving forces behind the continuous new highs of US stocks, gold, and BTC over the past decade. The world has been using "Japan's free money" to elevate risk assets. Now, the yield on Japan's 2-year government bonds has risen to 1% for the first time in 16 years, which means that this "free money pipeline" has been partially closed. 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 home, especially Japanese life insurance, banks, and pensions, which will reduce their allocation to overseas assets.
Global capital begins to withdraw from risk assets, and as long as the yen strengthens, it often indicates a decline in global market risk appetite.
How does the stock market influence?
The US stock market has experienced a bull market over the past decade, driven by the influx of cheap global capital, with Japan being one of the largest pillars behind it.
The rise in Japan's Interest Rate directly hinders a large influx of capital into the US stock market.
Especially when the current U.S. stock valuations are extremely high and the AI theme is under scrutiny, any withdrawal of Liquidity could amplify the correction.
The entire Asia-Pacific stock market has also been affected, with markets in South Korea, Taiwan, and Singapore having previously benefited from the yen carry trade. As Japanese interest rates rise, funds begin 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 put pressure on stocks in the short term, especially for companies heavily reliant on exports. However, in the long term, the normalization of 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, which was also his 90th birthday, Buffett publicly disclosed for the first time that he held about 5% of the shares of Japan's five major trading companies, with a total investment value of approximately $6.3 billion at that time. Five years later, with the rise in stock prices and continued investments, the total market value of the five major trading companies held by Buffett has surpassed $31 billion. From 2022 to 2023, the yen fell to nearly a 30-year low, leading to a "fire sale" of Japanese equity assets; this is a typical investment opportunity characterized by cheap assets, stable profits, high dividends, and potential currency reversal... such investment opportunities are extremely attractive.
Bitcoin and Gold
Aside from the stock market, how does the appreciation of the yen affect gold and Bitcoin?
The pricing logic of gold has always been simple:
The US dollar weakens, gold prices rise; real interest rates decline, gold prices rise; global risks increase, gold prices rise.
Each one is directly or indirectly related to the turning point of Japan's Intrerest Rate policy.
Firstly, the rise in Japan's interest rate means an appreciation of the yen, and in the US Dollar Index (( DXY), the yen accounts for as much as 13.6%. A stronger yen equates to direct pressure on DXY, and when the dollar weakens, gold naturally loses its greatest suppressive power, making it easier for prices to rise.
Secondly, the reversal of Japan's Intrerest Rate marks the end of over a decade of "global cheap money." Yen carry trades began to flow back, and Japanese institutions reduced overseas investments, leading to a decline in global Liquidity. During the Liquidity contraction period, funds are more inclined to withdraw from high-volatility assets ◇ and turn towards gold as a "settlement asset, safe-haven asset, and counterparty risk-free asset."
Third, if Japanese investors reduce their purchases of gold ETFs due to the increase in domestic Interest Rate, the impact will also be limited, as the main source of global gold demand is not in Japan, but in the long-term upward trends of central banks buying gold, ETF accumulation, and purchasing power in emerging markets. Therefore, the impact of this round of Japanese yield surge on gold is clear: there may be volatility in the short term, but it still leans towards bullish in the medium to long term. Gold is once again in a favorable combination of "Interest Rate sensitivity + Dollar weakening + Increased safe-haven demand," which is optimistic in the long run.
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 trades reverse, and global liquidity tightens, Bitcoin is often one of the first assets to decline; it is exceptionally sensitive to market changes, resembling a "liquidity ECG" of the market.
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