Japan's 10-year government bond yield rose above 3% on Tuesday, reaching a nearly 30-year high, as US Treasury Secretary Scott Bessent warned of risks from the unwinding of yen carry trades.

A key psychological threshold in the Japanese government bond market has been breached, and its potential global ripple effects are now the focus of the market. The yield on Japan’s 10-year government bond has climbed to a nearly 30-year high, which not only directly reflects changing expectations regarding Japan’s domestic monetary policy but also touches a sensitive nerve in global financial markets—“yen carry trades.” This trading strategy has long taken advantage of Japan’s low-interest-rate environment by borrowing yen to invest in high-yielding overseas assets. Should Japanese interest rates continue to rise—coupled with a potential rebound in the yen’s exchange rate due to safe-haven demand or a policy shift—the arbitrage margin would be significantly compressed or even reversed, potentially triggering a global wave of asset sell-offs and capital inflows back into Japan. The U.S. Treasury Secretary’s public warning underscores policymakers’ high level of vigilance regarding the risk that this could lead to disorderly deleveraging and undermine global financial stability.

The recent surge in Japanese government bond yields is not an isolated event; it occurred against a complex global macroeconomic backdrop. On the one hand, market expectations for the Bank of Japan to tighten monetary policy have become very strong, with traders nearly certain that interest rate hikes are imminent in the short term, which has directly pushed up long-term bond yields. On the other hand, as the background information indicates, geopolitical tensions in the Middle East have escalated sharply, triggering widespread risk aversion. High oil prices and concerns about global supply chains have exacerbated market volatility. In such an environment, investors typically close out high-risk positions and seek safe havens. The unwinding of yen carry trades—that is, selling overseas assets and buying back the yen—aligns precisely with this risk-aversion logic, and geopolitical conflicts could serve as a catalyst to accelerate this process.

Looking ahead, market attention will be heavily focused on the Bank of Japan’s actual actions. The market has already priced in expectations for a rate hike in September; the key now lies in signals regarding the subsequent policy path. Whether the central bank will signal more aggressive tightening—or whether its pace of rate hikes exceeds expectations—will directly influence the future trajectory of Japanese government bond yields. At the same time, the evolution of global risk sentiment—particularly the trajectory of the Middle East conflict—will be another key variable determining the scale and speed of unwinding in yen carry trades. Any signs of the conflict escalating or spiraling out of control could intensify the market’s risk-off sentiment, thereby amplifying the impact of changes in Japanese interest rates on global capital flows.