Talking About the Risks of Rate Hikes

Japan faces government bond yields at a 30-year high (2-year) plus the yen exchange rate at a high of 160. As the second-largest bond market after the US and China, Japan’s bond market size is as large as $13.5 trillion, and its debt-to-GDP ratio ranks first among developed countries. Japanese government bonds were sold off in advance, but the exchange rate didn’t rise—this shows that the yen carry-trade funds didn’t come back at all; this portion of capital is being far too optimistic about risk.
But there’s still a sword not put down—the Federal Reserve is slowing the pace of rate cuts. The 0 basis point rate cut in 2026 has already surged from 6% to 43%. After Iran’s ceasefire, crude oil prices still haven’t come down either, and inflation will become a problem that troubles the US (the US 2-year Treasury yield is still higher by 0.4% than before the outbreak of war).
So the environment for yen carry-trade funds is extremely harsh. In addition to Japan’s rate hikes, the FX spread between JPY-denominated bonds and dollar assets is also being compressed. If this portion of funds closes positions and flows back into yen, crypto will also be among the assets being dumped.