Global financial markets are facing mounting pressure as Japan’s government bond market experiences unprecedented turmoil. On Wednesday, yields on Japan’s 30-year government bonds soared to a record 3.2% following the country’s poorest bond auction in decades.
Analysts warn this upheaval could trigger the collapse of the decades-old yen carry trade—a $1 trillion system built on borrowing low-interest yen to invest in higher-yielding assets worldwide.
Fawad Razaqzada, market analyst at City Index and FOREX.com, highlighted that rising inflation and the Bank of Japan’s gradual policy normalization put this long-standing trade at risk. Since Japan’s zero-interest rate policy began in 1999, investors have relied heavily on yen borrowing to fund global investments.
Axel Rudolph of IG cautioned that unwinding carry trade positions could lead to sharp currency swings, with the yen strengthening significantly against currencies of countries hosting Japanese investments. This could spark liquidity crises and sharp asset price drops, escalating systemic financial risks.
Japan’s status as the largest foreign holder of U.S. Treasuries, with $1.1 trillion in holdings, adds complexity. Forced sales to support Japan’s markets could amplify the impact of the recent U.S. credit rating downgrade, driving Treasury yields higher. Razaqzada notes that both Japan and the U.S.—the world’s largest debt markets—are now precariously balanced.
Gold, traditionally a safe haven, could benefit most amid this uncertainty. Despite rising bond yields typically increasing the cost of holding gold, prices rose from $2,400 to $2,600 per ounce during early signs of carry trade unwinding last year.
Razaqzada advises investors to watch support levels between $3,245 and $3,275, with a break above $3,360 potentially driving gold toward $3,400 and its all-time high of $3,500 per ounce.
As volatility in Japan’s bond market grows, global investors are closely monitoring the Bank of Japan’s policy moves and their impact on capital flows and safe-haven allocations worldwide.
