Japan's 40-year government bond yield breaks 4%! Yen arbitrage trading triggers $2.5 billion in Bitcoin liquidations

The era of “free money” that Japan has maintained for decades has officially come to an end. On January 23, the Bank of Japan kept the policy rate at 0.75% but signaled that future rate hikes are still possible. The 40-year government bond yield broke through 4%, and liquidity indicators surged to a record high. Forced liquidations of yen arbitrage trades triggered a chain reaction, causing Bitcoin to plummet from $89,398 to $75,500, with daily liquidation amounts exceeding $2.5 billion.

Liquidity Collapse in Japan’s Bond Market Sparks Global Turmoil

For decades, Japan has been the most favored financing haven for traders worldwide. You could borrow yen at near-zero interest rates, buy almost any higher-yielding asset, and with some currency hedging, earn steady profits under the Bank of Japan’s umbrella. This “free lunch” officially ended in late January 2026.

The BOJ’s decision on January 23 maintained the policy rate around 0.75%, but the key message was that further rate hikes remain possible—0.75% is not the end. Even more shocking was the intense volatility in Japan’s bond market, with the 10-year Japanese government bond yield reaching about 2.25% on January 28, double that of the same period last year. The most pressure was on long-term bonds, with the 40-year government bond yield breaking above 4% during the sell-off in late January, turning a technical bond report into a nationwide referendum on whether Japan’s “free money” still exists.

Bloomberg reported that liquidity indicators in Japan’s bond market surged to historic highs, reflecting abnormal deviations between yield trading prices and normal levels. The report pointed out that the obvious “twist” in the yield curve signals strained market-making capacity and unstable price discovery. For years, the BOJ has viewed liquidity issues as a known vulnerability, which becomes especially severe when market volatility returns.

The fundamental promise of the bond market is that even large trades won’t cause significant price swings. Once this promise weakens, yields can gap sharply, and the capital flows that should be absorbed can’t be processed in time, leading to extreme volatility and liquidity shortages. This was precisely what happened in late January, with the dramatic repricing of 40-year bonds impacting hedging systems, balance sheets, and risk tolerance.

The Financial Times reported that the BOJ warned of rapid yield fluctuations and said it would continue providing intervention tools to address “abnormal” conditions, not ruling out further monetary tightening before 2026. This combination is the new reality: Japan can no longer guarantee low yields and low volatility, and any portfolios financed with yen must now consider this as a genuine risk factor.

Collapse of Yen Arbitrage Trades Triggers Bitcoin Liquidations

The link between Bitcoin and Japan’s bond market is relatively simple. It doesn’t require Japan to be in a full-blown crisis to be affected—just a brief, slight fluctuation in the yen can force leverage across markets to shrink simultaneously. In such cases, cryptocurrencies tend to fluctuate like high-beta, liquid assets until positions are reset.

Arbitrage trading is essentially interest rate differentials plus leverage, plus currency risk. When yen volatility rises, this risk exposure becomes expensive, and the leverage that made the trades attractive becomes ineffective. Liquidations rarely stay within the forex market because capital layers are often located below various positions across multiple markets. An additional factor accelerating this process this week is intervention risk. When USD/JPY approaches 160, it could trigger broad official attention, prompting traders to factor in sharp unilateral moves.

Barron’s views the long-term sell-off in Japan’s bond market as a global event, simply because Japan is a major holder of foreign assets (especially U.S. Treasuries), so any measures encouraging capital repatriation or hedging could impact U.S. interest rates. This cross-market chain reaction is precisely what ignited the Bitcoin liquidation wave.

Transmission Path of Yen Arbitrage Collapse

· Japanese bond yields soar, liquidity tightens

· Yen financing costs rise, arbitrage attractiveness plummets

· Global leveraged positions forced to liquidate simultaneously

· High-liquidity assets (including Bitcoin) are sold off first

· Cryptocurrency markets see rapid leverage liquidations

Bitcoin plays a very special role in the crypto market. During forced deleveraging, the market sells assets they can sell, not assets they want to hold. Cryptocurrencies inherently have high leverage, so when other markets panic, they tend to react quickly and decisively.

Bitcoin Crashes from $89,000 to $75,500

After sensing volatility in Japan’s bond market, the market reaction was extremely intense. On January 25, Bitcoin closed around $86,642, on January 26 around $88,331, and by January 28, it approached $89,398. However, over the weekend, Bitcoin and the entire crypto market plunged sharply, with Bitcoin dropping to a low of $75,500, and liquidation amounts exceeding $2.5 billion.

This roughly 15.5% decline from nearly $90,000 to $75,500 would typically take weeks in traditional markets, but in crypto, it happened within days. More importantly, this decline was not due to deteriorating fundamentals of Bitcoin itself but stemmed from a liquidity crisis in the distant Japanese bond market—classic of a global leverage trading network.

All macro trading sectors seem focused only on yen volatility and intervention rumors, which are precisely the catalysts that rapidly compress market leverage. Bitcoin liquidations are the first and most intense response. Crypto exchanges’ liquidation mechanisms are automated; when prices hit liquidation levels, positions are immediately closed. This mechanical selling further accelerates the decline, creating a vicious cycle.

Recent reports on the auction of 40-year Japanese government bonds show strong demand, with yields falling back to around 3.9%, easing the previous panic-driven congestion. This “auction relief” narrative provides a short-term release mechanism, temporarily controlling the Bitcoin liquidation wave.

However, risk volatility triggered by Japan is often swift and unpredictable. Once a reliable release mechanism emerges—such as a popular auction or a policy message that can limit short-term tail risks—these volatility spikes tend to subside quickly. That’s why Bitcoin tends to rebound before macroeconomic clarity is achieved, as the market simply completes its position reduction.

Japan Becomes a Volatility Switch for Crypto Markets

The most direct conclusion is that Japan’s bond market has become a volatility switch for cryptocurrencies. Once this switch is flipped, Bitcoin’s performance often resembles liquidity-driven swings, and intraday trends can be worse than the actual situation because leverage is simultaneously reduced worldwide. If Japan’s old regime is about to end, arbitrage trades don’t need to vanish entirely to impact Bitcoin; they only need to become less dull.

Once the yen begins to move with short-term protective pricing surges, and long-term Japanese bond yields rise sharply instead of gradually falling, large positions worldwide can instantly become fragile. This fragility directly spills over into the crypto space because Bitcoin’s liquidation is the fastest and most obvious signal in the global deleveraging process.

This is why Japan’s bond market is so critical for crypto now: it’s a place where calm can quickly vanish, and in highly leveraged assets, calm is more valuable than conviction. Traders need to watch closely the changes in the 10-year and 40-year Japanese government bond yields, as these indicators now serve as leading signals for Bitcoin liquidation risks.

When the cost of yen arbitrage rises, the adjustment of leveraged positions worldwide won’t happen gently but will occur at lightning speed. Bitcoin, as a high-liquidity asset traded 24/7, is often the first and most dramatic responder in this adjustment. In the coming months, every fluctuation in Japan’s bond market could trigger the next wave of Bitcoin liquidations.