Japanese government bond yields break 4%: the end of an era and the beginning of a global liquidity crisis

Japan’s 40-year government bond yield yesterday broke through 4% for the first time, reaching a historic high since its launch in 2007. This is not just a numerical milestone but marks the official end of Japan’s long-standing “zero interest rate era.” Meanwhile, global financial markets have begun to experience intense turbulence—cryptocurrencies have plummeted across the board, with 240,000 traders forced to liquidate positions totaling $680 million in a single day, and the Nikkei 225 opening down over 1%. What is at the core of this storm, and how will it spread globally?

Japan’s Bond Yield “Out of Control”

According to the latest news, Japanese government bond yields are soaring across the board. The 10-year yield rose to 2.3%, the highest since February 1999; the 20-year yield increased to 3.295%; the 30-year hit 3.60% for the first time; and the 40-year surpassed 4%. These figures may seem insignificant, but what do they mean for the Japanese economy?

Trigger: Central Bank Forced to Let Go

The Bank of Japan is reducing its bond purchase efforts. According to reports, the central bank’s monthly bond-buying scale has been cut from 6 trillion yen to 3 trillion yen—halving it directly. The underlying logic is brutal: the yen is collapsing. Since 2011, the yen has depreciated by 50% against the RMB. Without action, the credibility of the yen will be completely undermined.

Meanwhile, Japan’s political sphere is also applying pressure. Reports suggest that early general elections are expected, with political parties advocating for lowering consumption taxes to ease inflationary pressures. While these proposals are politically popular, they exacerbate market concerns about Japan’s fiscal health—since consumption taxes are a major source of government revenue, tax cuts would increase fiscal pressure.

Deeper Issues

Japan holds about $10 trillion in government debt, with 52% held by the central bank. When the central bank stops large-scale bond purchases, the market must absorb these bonds. Investors react directly: demanding higher yields to compensate for risks.

This marks the beginning of a vicious cycle. Rising bond yields → increased government debt servicing costs → greater fiscal pressure → further decline in investor confidence → yields continue to rise.

Global Chain Reaction Has Started

Market Real-Time Response

Yesterday, the Asia-Pacific markets already showed the shockwave:

• The Nikkei 225 and Topix futures opened down about 1%
• Sumitomo Pharmaceuticals fell over 8%, Sumitomo Chemical dropped over 5%, SoftBank declined nearly 1.5%
• U.S. stock futures declined: Dow down 0.69%, S&P 500 down 0.82%, Nasdaq 100 down 1.13%
• European STOXX 50 and German DAX futures fell over 1%
• Cryptocurrencies plunged across the board, Bitcoin dropped below $92,000, nearly 3% intraday; Ethereum down 3.5%
• Nearly 240,000 traders were liquidated, with total liquidation amount reaching $680 million

Threat of Funds Flows Returning to Japan

This is the real risk. Japan holds over $1 trillion in U.S. Treasuries and billions of dollars in global stocks and bonds. These investments initially attracted Japanese investors because Japanese bond yields were near zero—in such an environment, any overseas returns appeared very attractive.

But now, the situation has reversed. Japanese government bonds finally offer real returns and are relatively safe. After hedging currency risk, U.S. Treasuries are actually a loss for Japanese investors. Reports suggest this will lead to “hundreds of billions of dollars withdrawing from global markets,” and this will not be a gradual process but a liquidity vacuum.

Risk of Liquidation in Yen Arbitrage Trades

Over the past decade, yen arbitrage trading has been a significant part of the global financial market. Investors borrow yen at low costs to invest in high-yield assets like stocks, cryptocurrencies, and emerging markets. This strategy performed perfectly during yen depreciation.

But now, Japanese interest rates are rising, and the yen is strengthening. This means all these arbitrage positions are in loss. When these positions are liquidated, a strong selling pressure will form.

Historical Warnings: Rising Yields Often Trigger Crises

Reports indicate that historical data provides clear warnings:

• Early 2023, soaring U.S. Treasury yields led to a sharp decline in bond portfolios of regional banks like Silicon Valley Bank, ultimately causing their collapse, prompting the Fed to intervene
• September 2022, UK bond yields surged after Liz Truss announced her budget, forcing the Bank of England to launch emergency bond-buying programs
• 2010-2012, bond yields in Greece, Italy, Spain, Portugal, and Ireland soared to unsustainable levels, prompting large-scale interventions by the European Central Bank

Japan now faces an even more complex situation. It is not just a national issue but involves one of the largest creditor nations in the global financial system.

Summary

Japan’s 40-year government bond yield breaking through 4% is not an isolated event but the beginning of a stress test for the global financial system. It signifies three key shifts:

1. Change in BOJ Policy: From unlimited easing to forced tightening, marking the end of the “zero interest rate era”

2. Precursor to a Global Liquidity Crisis: Thousands of billions of Japanese funds are seeking new investment destinations, which will impact global equities, bonds, and crypto markets

3. Historic Financial Risk: Japan’s economy is growing near zero, yet bond yields are hitting new highs—rare in history—reflecting deep market concerns about its economic outlook

For the cryptocurrency market, short-term pressure is inevitable. But in the long run, this situation actually reinforces Bitcoin’s value proposition as a “non-sovereign asset.” When traditional financial systems face stress, alternative assets tend to become more attractive. The current decline may lay the foundation for future gains.