Japanese bond chaos threatens record Bitcoin liquidation as cheap money ends

Japan was once a paradise for cheap borrowing transactions to invest and generate high returns. Investors could borrow yen at extremely low interest rates, buy almost any asset with higher yields, hedge just enough to “fulfill responsibilities,” and assume that the Bank of Japan (BOJ) would keep volatility low.

By the end of January 2026, it shows what happens when that assumption begins to crack.

In the decision on January 23, the BOJ maintained its policy interest rate around 0.75%. However, the central bank also emphasized that there is still room to raise rates further and does not see 0.75% as the final point.

At the same time, the Japanese government bond market entered a zone once considered unthinkable under yield curve control. The 10-year JGB yield was around 2.25% on January 28, nearly double what it was a year earlier.

The greatest pressure lies in the long-term: the 40-year yield surpassed 4% during the late January sell-off, turning a technical market event into a major question about whether Japan’s “cheap money” era still exists.

The relationship between Bitcoin and Japan is quite simple. The crypto market doesn’t need Japan to fall into a full-blown crisis to be affected; just a strong yen volatility can force leveraged transactions to shrink across multiple markets simultaneously. In such cases, crypto often trades as a high-beta asset sensitive to liquidity until positions are rebalanced.

Why the bond market can be “like altcoins”

The bond market operates based on a promise: investors can trade large volumes without causing excessive price movements. When that promise weakens, yields can spike just because flows that normally can be absorbed by the market suddenly can’t, making trading choppy and liquidity thin.

This was the context of the liquidity warnings for JGBs at the end of January. Liquidity measures showed record distortions between actual traded yields and “reasonable” levels under normal conditions, reflecting a stressed market-making capacity and patchy price formation.

The BOJ has long acknowledged that JGB liquidity is a vulnerability, especially when volatility returns.

The issue is most evident in the long-term maturities. Fluctuations in the 10-year bond are important, but the intense repricing of 30–40 year maturities truly pressures the hedging systems, balance sheets, and risk limits simultaneously. The spike in the 40-year yield above 4% at the end of January is a prime example.

Then comes the familiar pattern in tense conditions: temporary “relief” pressure helps the market cool down but doesn’t address the root problem. The subsequent 40-year JGB auctions saw increased demand, pulling yields back to around 3.9%, easing the “fearful” trading frenzy.

Meanwhile, the BOJ warned about rapid yield fluctuations and stated it would maintain intervention tools for “extraordinary” conditions, even as it leaves open the possibility of further tightening in 2026.

The reality is that Japan can no longer guarantee both low yields and low volatility at the same time. Any portfolio using yen as a funding source must now consider this a real risk factor.

Yen carry trade as a “trigger” for Bitcoin volatility

Carry trade essentially exploits interest rate differentials with leverage, along with exchange rate risk. When yen volatility increases, hedging costs rise, and leverage that once made trades attractive becomes ineffective. The process of unwinding positions rarely stays confined to the forex market, as yen-denominated borrowing often underpins positions across various markets.

A factor that accelerates this process is intervention risk. USD/JPY near 160 often draws strong attention from authorities, especially in politically sensitive contexts, forcing traders to price in the possibility of sudden one-sided moves even if the spot rate appears stable.

The sell-off in long-term JGBs is also a global phenomenon because Japan is one of the largest foreign investors, especially in US Treasuries. Any move encouraging repatriation or increased hedging can spill over into US yields.

Bitcoin plays a very specific role in this chain of reactions. During forced deleveraging episodes, the market sells what it can, not what it dislikes. Crypto, with its high leverage, tends to react early and clearly when other markets panic.

Bitcoin declined and then rebounded when signals of volatility from JGBs appeared, closing around $86,642 on January 25 and $88,331 on January 26, before climbing to about $89,398 on January 28.

However, the following weekend, Bitcoin and the broader market plunged sharply, with Bitcoin hitting $75,500 at one point and over $2.5 billion in positions liquidated. Macro trading desks’ focus was almost entirely on yen volatility and intervention stories — the typical catalysts that can compress leverage broadly and often hit Bitcoin first.

Nevertheless, risk shocks originating from Japan are usually strong and swift. They can ease quickly when the market receives a credible “pressure release valve,” such as a successful auction or a policy message that helps limit short-term tail risks.

The cooling after this week’s auction aligns with that pattern and serves as a reminder that not every macro shock turns into a multi-week trend.

If Japan’s old era is truly ending, carry trades don’t need to be fully unwound to impact Bitcoin; they just need to become less “boring.” When yen volatility and short-term hedging costs spike, and long-term JGB yields start jumping in leaps rather than gradual steps, many global positions become fragile simultaneously — and that fragility spills over into crypto.

The simple conclusion is that Japan has become a “volatility switch.” When switched on, Bitcoin often acts as a liquidity gauge, and price charts can look worse than the fundamental story because leverage is being pulled back everywhere.

When switched off, Bitcoin tends to recover before macro stories are fully resolved, simply because the market has already completed its position reduction process.

That’s why the Japanese bond market is especially important for crypto right now: it’s a place where calm can vanish very quickly, and in an asset class full of leverage, calm sometimes matters more than confidence.

Thach Sanh