Japan's government bond Intrerest Rate has surpassed 1%, and the ghost stories of the global financial market have begun.

Author: Liam Shen Chao TechFlow

Let me tell you a ghost story:

Japan's two-year government bond yield rose to 1% for the first time since 2008; the five-year government bond yield increased by 3.5 basis points to 1.345%, the highest since June 2008; the 30-year government bond yield briefly touched 3.395%, setting a new historical high.

The significance of this matter is not just that “the interest rate has exceeded 1%”, but rather:

The era of extreme monetary easing in Japan over the past decade or so is being permanently written into history.

From 2010 to 2023, Japan's two-year government bond yield has almost always hovered between -0.2% and 0.1%. In other words, money in Japan used to be free or even paid to lend to you.

This is due to Japan's economy being trapped in a deflationary trap 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 rates, making funds as cheap as possible. Borrowing money is almost free, and keeping money in the bank incurs a cost, thereby forcing everyone to invest and consume.

Currently, Japan's government bond yields have shifted from negative to positive, rising to 1%, which not only concerns Japan itself but also affects the world, at least in three aspects:

First of all, 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 that maintains “ultra-low interest rates”; the era of monetary easing has been completely terminated.

Secondly, it has also changed the global capital pricing structure.

In the past, Japan was one of the world's largest overseas investors (especially pension funds like GPIF, insurance companies, and banks), mainly due to the low domestic interest rates. In pursuit of higher yields, Japanese companies extensively invested abroad, directing funds to the United States, Southeast Asia, and China. Nowadays, as domestic interest rates rise, the “outbound motivation” of Japanese funds is expected to decline, and there may even be a shift of funds back to Japan.

Finally, the most concerning point for traders is that a 1% increase in Japanese interest rates means that the funding chain relying on Japan for carry trade over the past 10 years will experience a systemic contraction.

This will affect the US stock market, Asian stock markets, the foreign exchange market, 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, one important reason for the continuous rise of global risk assets such as U.S. stocks and Bitcoin is the Yen Carry Trade.

Imagine the money you borrow in Japan is almost free.

Borrow 100 million yen in Japan with an interest rate of only 0% to 0.1%, then exchange this 100 million yen for US dollars, and use it to buy US Treasury bonds with yields of 4% or 5%, or invest in stocks, gold, or Bitcoin, and finally convert it back to yen to repay the loan.

As long as there is a difference in interest rates, you can make money; the lower the interest rate, the more arbitrage there is.

There is no publicly available exact figure, but global institutions generally estimate that the scale of yen arbitrage ranges from 1 to 2 trillion USD at the low end, and between 3 to 5 trillion USD at the high end.

This is one of the largest and most invisible sources of liquidity in the global financial system.

Many studies even suggest that Yen arbitrage is one of the true driving forces behind the continuous record highs of US stocks, gold, and BTC over the past decade.

The world has been using “Japan's free money” to boost risky assets.

As of now, Japan's 2-year government bond yield has risen to 1% for the first time in 16 years, which means that part of this “free money pipeline” has been shut off.

The result is:

Foreign investors can no longer borrow cheap yen for arbitrage, and the stock market is under pressure.

Domestic capital in Japan is also beginning to flow back into the country, especially Japanese life insurance, banks, and pension funds, which will reduce their allocation to overseas assets.

Global capital begins to flee risk assets, and a stronger yen often means a decline in global market risk appetite.

How does the stock market affect?

The bull market in the US stock market over the past 10 years has been driven by the influx of cheap global capital, with Japan being one of the biggest pillars.

Japan's rising interest rates directly hinder the influx of large amounts of capital into the US stock market.

Especially with the current** US stock market **valuation being extremely high and doubts about the AI theme, any withdrawal of liquidity could magnify the pullback.

The entire Asia-Pacific stock market has also been affected, with markets such as South Korea, Taiwan, and Singapore having benefited from the yen carry trade in the past.

As Japan's interest rates rise, funds will start to flow back to Japan, and the volatility of Asian stock markets will increase in the short term.

For the Japanese stock market itself, a rise in domestic interest rates will put short-term pressure on the stock market, especially on companies that heavily rely on exports. However, in the long run, the normalization of interest rates will help the economy break free from deflation and re-enter a growth phase, leading to a reconstruction of the valuation system, which is actually a positive development.

This may also be the reason why Buffett continues to increase his investment in the Japanese stock market.

Warren Buffett publicly disclosed for the first time on August 30, 2020, which was his 90th birthday, that he had acquired approximately 5% of the shares in Japan's five major trading companies, with a total investment value of about $6.3 billion at that time.

Five years later, with the rise in stock prices and continuous investment, the total market value of the five major Japanese trading companies held by Buffett has surpassed 31 billion dollars.

From 2022 to 2023, the Japanese yen fell to nearly a 30-year low, and Japanese equity assets overall were “heavily discounted.” For value investors, this presents a typical investment opportunity with cheap assets, stable profits, high dividends, and a potential reversal in exchange rates… Such investment opportunities are very 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 dollar is weak, gold prices rise; real interest rates fall, gold prices rise; global risks increase, gold prices rise.

Each of them has a direct or indirect connection with the turning point of Japan's interest rate policy.

First of all, the rise in Japanese interest rates means an appreciation of the yen, and in the dollar index (DXY), the yen accounts for as much as 13.6%. A stronger yen is equivalent to directly putting pressure on the DXY; when the dollar weakens, gold naturally loses its greatest suppressive power, making it easier for prices to rise.

Secondly, the reversal of interest rates in Japan marks the end of more than a decade of “global cheap money.” Yen carry trades are starting to flow back, and Japanese institutions are reducing overseas investments, leading to a decline in global liquidity. During the liquidity contraction cycle, funds are more likely to withdraw from high-volatility assets and turn to gold as a “settlement asset, safe-haven asset, and counterparty risk-free asset.”

Thirdly, if Japanese investors reduce their purchases of gold ETFs due to rising domestic interest rates, this impact will also be limited, as the main source of global gold demand is not in Japan, but in the long-term upward trend of central bank gold purchases, ETF increases, and purchasing power in emerging markets.

Therefore, the impact of this round of rising Japanese yields on gold is clear:

Short-term may be volatile, but medium to long-term still leans bullish.

Gold is back in a favorable combination of “interest rate sensitivity + dollar weakening + rising safe-haven demand”, and is optimistic in the long term.

Unlike gold, Bitcoin is considered the most liquid risk asset in the world, traded around the clock and highly correlated with the Nasdaq. Therefore, when Japanese interest rates rise, yen arbitrage trades flow back, and global liquidity contracts, Bitcoin is often one of the first assets to decline; it is exceptionally sensitive to the market, like a “liquidity ECG” of the market.

But a short position does not equate to long-term pessimism.

Japan entering an interest rate hike cycle means an increase in global debt costs, intensified fluctuations in U.S. bonds, and rising fiscal pressure on various countries. Against this macro backdrop, assets with “no sovereign credit risk” are being reassessed: in traditional markets, it is gold, while in the digital world, it is Bitcoin.

Therefore, the path of Bitcoin is also very clear: short-term declines along with risky assets, but in the medium term, it will welcome new macro-level support due to the rise of global credit risk.

In short, the era of risk assets that thrived on “Japanese free money” over the past decade has come to an end.

The global market is entering a new interest rate cycle, a more realistic and also more brutal cycle.

From the stock market and gold to Bitcoin, no asset can stand alone.

When liquidity withdraws, assets that can stand firm become more valuable. During a cycle transition, understanding that hidden capital chain is the most important skill.

The curtain has been raised on the new world.

Next, let's see who adapts faster.