Japan's Record Bond Yields Put Yen Carry Trade Back in Focus: Could This Spark Fresh Trouble For US Markets?

Japan’s 30-year treasury yields touched their highest level on record, at 3.52% on Tuesday night, a 48-basis-point increase since November, sparking concerns of potential fallout across the U.S. and global markets.

Deteriorating Fiscal Conditions Push Yields Higher

After decades of serving as the world’s low-yield anchor, with negative short-term interest rates, Japan’s government bond yields have surged significantly over the past year.

This comes as concerns mount over Japan's fiscal trajectory, after the country’s lawmakers approved a record ¥122.3 trillion, or $785 billion budget last month for the fiscal year starting in April 2026, driven by major increases in social welfare and defense spending.

This is also in addition to the ¥21.3 trillion, or a $140 billion economic stimulus package that was approved by the government led by new Prime Minister Sanae Takaichi.

Japan's bond market situation is getting worse:

Japan's 10Y government bond yield has surged to 2.12%, the highest since 1999.

At the same time, the 30Y yield is up to 3.46%, the highest on record.

Since the start of 2025, both yields have skyrocketed +104 and +120 basis… pic.twitter.com/HiOSRpEluH

— The Kobeissi Letter (@KobeissiLetter) January 5, 2026

Rising Yields, Falling Yen

Economist Robin Brooks said that while yields have climbed sharply in recent years, they “are still way below where they would be if markets were able to freely set them.”

According to Brooks, the Bank of Japan remains a large buyer of longer-term bonds, which essentially caps yields. As a result, he said, the “rising risk of a debt crisis” is being priced in the Japanese Yen, which continues to remain under pressure.

This means that “the currency, not yields, is what to watch when it comes to gauging Japan's fiscal risk,” he said, in his newsletter last week.

The Japanese Yen has dropped over 34% over the past 5 years against the U.S. Dollar and 6.6% over the past six months, during a period when the dollar itself remained under pressure.

Spillover From Surging Bond Yields

Japan's prolonged low-rate environment supported one of the world's largest carry trades, in which investors borrowed cheaply in yen, while investing in higher-yielding assets abroad.

This trade came to a crashing halt in 2024, when the Bank of Japan brought an end to its negative short-term interest rates by raising rates for the first time in 17 years.

The sudden unwinding of the carry trade that was running for nearly two decades sent global markets into a tailspin, as hedge funds scurried to cover their positions, sucking liquidity from the markets.

What’s Next For Investors?

Now, as Japanese bond yields continue to touch new highs, investors are once again bracing for headwinds, with BOJ Governor Kazuo Ueda merely hinting at potential rate hikes last month, leading to downward pressure on U.S. equities, Bitcoin (CRYPTO: BTC) and U.S. Treasuries.

However, Bob Elliott, the Chief Investment Officer at Unlimited, dismissed concerns regarding the yen-carry trade in his Substack newsletter earlier last month, saying that the market’s exposure to Japan’s monetary moves has shrunk significantly since the 2008 financial crisis.

Elliott’s views were echoed by Adarsh Sinha, the global head of G10 Rates and FX strategy at BofA Securities, who said, “there’s no sign right now of an excessive yen carry trade buildup,” based on data from Yen-denominated bond issuance by foreign companies, according to a report by MarketWatch.

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