Yen Carry Trade on Shaky Ground as Japan's Two-Year Yield Hits 31-Year High

Japan's two-year government bond yield reached its highest level in over 31 years on Monday, climbing to 1.746%. This move is significant because it affects the cost of the yen carry trade, which has been a major driver of global risk assets, including Bitcoin (BTC).

The two-year yields track what traders expect from the Bank of Japan (BOJ), and swap markets now price roughly 88% odds of a rate increase in September. This would normally support a currency, but instead, the yen weakened.

In fact, despite Tokyo deploying $97 billion between July 30 and August 26, the currency has already surrendered more than half of those gains. The spread between US and Japanese two-year yields has narrowed to 2.64%, which is less than half of its peak in 2023 and 2024.

For four decades, the yen tracked this spread closely, but now it's diverging. This points away from interest rates as the main driver and suggests a confidence problem that higher rates alone cannot solve.