Rising Japanese Rates, Negative Real Rates, and Risks to the Yen Carry Trade

This analysis is based on the Seeking Alpha report [4] published on December 28, 2025, which highlights that rising Japanese rates are pressuring the yen carry trade—a strategy involving borrowing yen at low rates to invest in higher-yielding global assets. Supplemental data provides critical context: as of December 22, 2025, the 10-year Japanese Government Bond (JGB) yield reached 2.081%, a 26-year high [2]. The 5-year retail JGB issued in November 2025 had a coupon rate of 1.22% [1], and with a bear-flattening yield curve [3], the 5-year yield is estimated to be in the 1.5-2.0% range. Given Tokyo’s December inflation rate of 2.3%, this confirms the article’s claim that real rates remain negative, implying further nominal rate hikes are necessary to reach the 2.5% threshold for positive real rates.

1. Policy Shift Signal
   : The 26-year high in 10-year JGB yields [2] indicates a significant departure from Japan’s long-standing ultra-low interest rate policy, with potential ripple effects on global capital flows.
2. Carry Trade Vulnerability
   : While real rates remain negative, the 2.5% real rate target suggests substantial additional hikes ahead. This creates risks of sudden yen carry trade unwinding, which could trigger volatility in global asset markets [4].
3. Yield Curve Implications
   : The bear-flattening yield curve [3] reflects market expectations of near-term rate hikes, which could accelerate pressure on carry trade positions and influence global bond markets.

• Risks
  :
  • Global Market Volatility
    : Unwinding of yen carry trades could lead to sell-offs in higher-yielding assets (e.g., emerging market bonds, equities), increasing volatility across global markets [4].
  • Capital Flow Reversals
    : Higher Japanese rates may attract capital back to Japan from global markets, putting pressure on currencies and assets in countries dependent on carry trade financing.
• Opportunities
  :
  • Japanese Domestic Investments
    : Rising rates could make Japanese domestic bonds and savings accounts more attractive, potentially boosting domestic investment [1].

Japanese rates are at multi-decade highs, but real rates remain negative, necessitating further nominal rate hikes to reach the 2.5% threshold for positive real rates. The yen carry trade faces increasing pressure, with potential implications for global market volatility and capital flows. Critical data points include the 26-year high 10-year JGB yield (2.081% as of Dec 22, 2025) [2], estimated 5-year JGB yield (1.5-2.0%) [1][3], and Tokyo inflation rate (2.3%).