Japanese interest rates at highest level since 1996 — signals global turbulence

TL;DR

• Japan's ten-year yield reached 3 percent on Tuesday — the highest level in 30 years
• The Bank of Japan has been gradually unwinding its ultra-loose monetary policy since March 2024
• The rise in yields threatens the so-called yen carry trade system, which has supplied global liquidity for decades
• Risk assets, including equities and crypto, could come under pressure if normalization continues

Historic threshold breached in Tokyo

Japan's ten-year yield crossed three percent on Monday for the first time since 1996, according to data cited by Seeking Alpha. The move is not merely a technical milestone — it marks a fundamental shift in an economy that for more than two decades has been synonymous with near-zero interest rates and massive central bank stimulus.

The Bank of Japan (BoJ) introduced its so-called Yield Curve Control (YCC) policy in 2016, which kept the ten-year yield anchored near zero percent through active bond purchases. The goal was to combat deflation and stimulate growth. That policy has now effectively been dismantled.

From zero rates to normalization

The shift came gradually. In December 2022, the BoJ widened the corridor for the ten-year yield from plus/minus 0.25 to plus/minus 0.50 percentage points — an early signal of a change in direction. In March 2024, the central bank formally abolished both its negative policy rate and the YCC framework, setting the policy rate to between zero and 0.1 percent.

Since then, the BoJ has reduced its balance sheet by an estimated $407 billion by scaling back bond purchases, according to research data cited by Seeking Alpha. That represents a significant liquidity tightening — and markets are feeling it.

The carry trade machine comes under pressure

For decades, low Japanese interest rates have enabled what is known as the yen carry trade: investors borrow yen at near-zero cost and deploy the funds into higher-yielding assets elsewhere in the world. The scale is debated, but estimates range from one to over 14 trillion dollars in exposure — what some analysts describe as financial markets' "dark matter," exerting gravitational forces that are barely visible yet utterly decisive.

As Japanese yields rise, the profitability of this strategy erodes. Investors are forced to repay yen-denominated debt, which entails selling risk assets and repatriating capital to Japan. This is a mechanism that has historically triggered turbulence across global markets.

Risk assets in the danger zone

The link between Japanese monetary policy and global risk assets is well documented. According to research related to the matter, Bitcoin moves in line with global liquidity more than 83 percent of the time in any given twelve-month period — a higher correlation than any other major asset class.

When liquidity tightens, it is typically the so-called peripheral assets — crypto, emerging markets, speculative equities — that are sold first, while capital seeks safer ground. Analyst Shanaka Anslem Perera has described this as a classic flight from periphery to core.

OSEBX and Norwegian export companies are not immune: a stronger yen and increased volatility in global yields could affect currency crosses and risk appetite in the Norwegian market as well, even if direct exposure is limited.

What happens next?

The question market participants are now asking is whether the BoJ will continue its normalization or hit the brakes if turbulence in global markets intensifies. The central bank is balancing the need to restore monetary policy headroom against the risk of triggering a destabilizing capital flight.

Some analysts also point to a longer-term dimension: if investors lose confidence in central banks' ability to control inflation and sovereign debt, Bitcoin could over time strengthen its position as a non-sovereign store-of-value alternative. But this is an uncertain and controversial thesis, and the short-term picture points in the opposite direction.

How events unfold will depend largely on whether Japanese inflation persists and gives the BoJ the mandate to tighten further — or whether global turbulence slows the process.