Volatility in Japan's financial markets has intensified once again, with long-term borrowing costs hitting multi-decade highs. The yield on Japan's 10-year government bonds once climbed to 2.945%, reaching its highest level since September 1996, while the 30-year bond yield also rose in tandem to 4.115%. As the bond market sounds the alarm, the yen has weakened again, with the USD/JPY exchange rate falling back toward the 159 mark, nearly erasing the rebound gains achieved by official intervention earlier this month. However, amidst this dual sell-off in bonds and the currency, the cryptocurrency market has shown a starkly contrasting trend. Bitcoin has surged by 22% over the past week, completely decoupling from the downward drag of Japan's macroeconomic environment.

The underlying logic behind the severe fluctuations in Japanese asset prices still points to persistent and rising inflationary pressures. Japan's core inflation rate climbed to 1.8% in July, and if food and energy prices are excluded, the core-core inflation rate reached 1.9%. The better-than-expected price data has led traders to widely bet that the Bank of Japan will take further tightening actions at its mid-September policy meeting, with expectations that the benchmark interest rate will be raised from the current 1% to 1.25%. This strong expectation of exiting the ultra-loose monetary policy has directly driven the repricing of the bond market, causing the yield curve to continue steepening.

The shift in the interest rate environment is putting the massive yen carry trade to a severe test. For a long time, global investors have borrowed yen at extremely low borrowing costs to invest in higher-yielding overseas assets. According to estimates by the Bank for International Settlements, the scale of broad yen carry trade exposure has reached as high as $500 billion. Market insiders warn that once the yen exchange rate appreciates rapidly, the annualized returns of carry trade positions could be completely wiped out in a very short period. The extreme market conditions in early August this year already demonstrated the destructive power of this risk. At that time, the price of Bitcoin plummeted from $64,600 to $49,000 in just a few days, and the Nikkei TOPIX index also plunged 12% in a single day, highlighting the immense impact of sharp yen fluctuations on global risk assets.

Faced with continuous pressure on the foreign exchange market, Japanese authorities have attempted to stabilize the situation through forceful intervention. In early August, Japan deployed approximately $85 billion to defend the market, once pushing the yen exchange rate up to 155.20. However, market selling pressure quickly pushed the exchange rate back above 158, making the intervention effect relatively short-lived. Notably, to raise funds for intervention, Japan significantly reduced its U.S. Treasury holdings by $26.4 billion in June, bringing its total position down to $1.117 trillion, setting a record for the largest single-month reduction by any country. This move directly impacted the U.S. Treasury market, causing the yield on the U.S. 10-year Treasury note to surge to 4.74% in late August, forcing Washington to expand the scale of long-term Treasury buybacks to calm market volatility.