Chaos in Japan’s bond market risks record Bitcoin liquidations as the free money era concludes.

For many years, Japan was regarded as the premier destination for the easiest funding trade globally. You could secure yen at very low interest rates, invest in almost anything with a higher return, hedge sufficiently to maintain a sense of responsibility, and rely on the Bank of Japan to keep volatility in check.

As late January 2026 approaches, that assumption appears to be faltering.

The BOJ’s decision on January 23 maintained its policy rate guidance near 0.75%. However, the BOJ also indicated that it envisions a scenario where additional rate hikes are still feasible and that it does not consider 0.75% as a final point.

Simultaneously, Japan’s government bond market ventured into a realm that would have seemed unimaginable during the yield-curve-control era. On January 28, the 10-year JGB hovered around 2.25%, approximately double the level from just a year earlier.

The most significant stress point lies at the long end: the 40-year yield surged past 4% during the late-January selloff, transforming a technical bond report into a referendum on whether the “free money” that Japan had grown accustomed to still exists.

The relationship between Bitcoin and Japan is straightforward. It certainly does not require Japan to descend into a full-blown crisis to get influenced; a brief spell of yen volatility that compels leveraged trades to retract across markets simultaneously is sufficient. During such instances, crypto typically behaves like high-beta liquidity until positioning stabilizes.

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Why a bond market can feel like an altcoin

Bond markets operate on a straightforward premise, which is the ability to execute significant trades without the price fluctuating dramatically. When this assurance diminishes, yields can gap on flows that would typically be absorbed, and the market begins to exhibit nervousness and thinness.

This sets the stage for discussions around the unprecedentedly low liquidity in Japanese government bonds (JGB) in late January. Bloomberg reported a JGB liquidity indicator reaching a record high, indicating unusually large distortions in yield trading compared to where they would typically be in more stable conditions.

Reports highlighted visible “kinks” across the curve as a tangible indication that market-making capacity is under pressure and that price discovery is becoming erratic.

For years, the BOJ has articulated its approach to liquidity in JGB markets, which is significant because it frames this as a recognized vulnerability that intensifies when volatility arises.

The long end is where this issue becomes clear. A movement in the 10-year yield is important, but sharp repricing in 30-year and 40-year bonds is what begins to affect hedging systems, balance sheets, and risk limits simultaneously. Late January saw exactly that, with the 40-year yield exceeding 4%.

Then emerged a familiar pattern under stressed conditions: a rapid pressure release that calms the market without entirely resolving the issue that caused it.

Reports surrounding the latest 40-year JGB auction described significantly stronger demand, resulting in a pullback in the 40-year yield to approximately 3.9%, alleviating some tension from the most crowded fear trade.

The Financial Times also noted that the BOJ cautioned about rapid yield fluctuations and stated it was keeping intervention tools ready for “irregular” situations, while also remaining open to further tightening throughout 2026.

This mix represents the new reality: Japan can no longer assure both low yields and low volatility, and any portfolio utilizing yen funding must regard this as a genuine risk factor.

The yen carry trade is a volatility trigger for Bitcoin

The carry trade consists of rate differentials combined with leverage, wrapped in currency risk. When yen volatility increases, that wrapper becomes costly, and the leverage that made the trade appealing ceases to function effectively. The unwind rarely remains confined to FX because the funding layer supports numerous positions across various markets.

This week’s scenario also included an additional factor accelerating this process: the risk of intervention. USD/JPY levels approaching 160 can attract significant official scrutiny, particularly concerning political timing, prompting traders to anticipate sharp, one-sided movements even when spot prices appear stable.

However, Barron’s framed the long-end JGB selloff as a global narrative for a much simpler reason: Japan is a significant holder of foreign assets, particularly US Treasurys, so any action prompting repatriation or hedging can ripple into US rates.

Bitcoin occupies a very specific role in that sequence. During forced deleveraging, markets tend to sell what they can rather than what they dislike. Given that crypto is heavily leveraged, it often reacts quickly and distinctly when other markets begin to panic.

Bitcoin fell and then rebounded as soon as it sensed the JGB volatility, closing around $86,642 on January 25 and $88,331 on January 26, subsequently trading toward approximately $89,398 by January 28.

Alarmingly, this past weekend saw Bitcoin and the broader market plummet sharply, with Bitcoin hitting a low of $75,500 yesterday and over $2.5 billion in liquidations.

All macro desks appeared solely focused on yen volatility and intervention discussions, which is precisely the kind of catalyst that compresses leverage rapidly across markets, impacting Bitcoin first.

Nevertheless, risk spikes driven by Japan tend to be abrupt and swift. They can dissipate quickly once the market receives a credible release valve, such as a well-received auction or a policy statement that mitigates near-term tail risk.

The relief narrative from the auction this week aligns with that pattern and serves as a useful reminder for traders who instinctively try to transform every macro disruption into a prolonged theme.

If Japan’s previous regime is concluding, the carry trade doesn’t have to completely unwind to impact Bitcoin; it merely needs to stop being dull. The moment yen movements begin to coincide with rapidly increasing short-dated protection pricing, and when long-end JGB yields start to jump in large increments rather than gradually sliding, a great deal of global positioning becomes fragile concurrently. That fragility is what spills over into crypto.

The clear takeaway is that Japan has become a volatility switch. When the switch is activated, Bitcoin often acts like liquidity, and the market can appear worse than the underlying situation due to the simultaneous reduction of leverage across the board.

When the switch is turned off, Bitcoin frequently rebounds before the macro narrative feels resolved, as the market has simply finished reducing positions.

This is why Japan’s bond market is significant for crypto at this moment: it’s a place where tranquility can evaporate swiftly, and in a leverage-intensive asset class, calmness is more valuable than conviction.

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