Japan's domestic borrowing costs have reached the highest level since 1996. On the same morning, the 30-year government bond yield hit 4.185%, while the 10-year government bond yield stood at 2.945%.
For a country that has long relied on negative interest rates to combat deflation, this marks a significant shift.
Meanwhile, Bitcoin has surged 22% in the past week, crossing $80,000 for the first time since May. The core contradiction explored in this article lies in the fact that while the Japanese bond market is experiencing intense volatility, the crypto market has shown relative resilience.
The Underlying Logic of Yen Carry Trades
Over the past few years, yen carry trades have been a key driver of the global risk asset markets. Investors borrow low-cost yen, convert it to dollars, and then use it to purchase various higher-yielding assets.
According to the Bank for International Settlements, off-shore non-bank institutions have around $250 billion in yen-denominated loans; using a broader measure, this figure could reach $500 billion. Such massive leverage is built on a core assumption: that Japanese interest rates will remain near zero for the long term. The current reality has overturned this old assumption.
In June, the Bank of Japan raised its policy rate to 1.0%, marking a 31-year high.
There is a widespread market expectation that at the September 17-18 policy meeting, the central bank will raise rates again. Japan's unique monetary environment of the past three decades is crumbling, and the 2.88% yield on the 10-year government bond is not just a cold number. Once the yen appreciates rapidly, carry trade positions can quickly shift from profit to loss.
Praneet Shah of Goldman Sachs stated, "With just a movement in the exchange rate, the entire annualized yield of the position will be completely wiped out."
We witnessed this scenario in August 2024: due to the yen's appreciation, Bitcoin plunged from around $64,600 to $49,000 on August 5. The Tokyo Stock Price Index (TOPIX) even plummeted by 12% in a single trading day.
But the situation is different now.
This month, the yen has given back over half of its gains from exchange rate intervention, currently weakening, trading around 159 against the dollar. A weaker yen would rekindle the attractiveness of carry trades, so the Bank of Japan's future policy direction regarding the yen deserves close attention.
Debt Cliff
At the end of June, Japan's national debt reached a record high of ¥134.6 quadrillion (equivalent to $9.1 trillion). The Japanese government expects the debt to climb to ¥149.2 quadrillion by the end of this fiscal year. Prime Minister Sanae Takamichi announced that starting April 2027, the consumption tax will be reduced to 1% for two years, adding ¥5 trillion to the fiscal deficit.
This has created a dilemma: Japan needs higher interest rates to stabilize the yen and curb inflation, but raising rates will significantly increase the interest payment pressure on the huge national debt.
The Bank of Japan announced that it will slow down its debt reduction pace starting April 2027, indicating a policy priority to maintain market stability rather than pursue rapid monetary policy normalization. Nevertheless, the bond market has already shown clear signs of lack of confidence.
Japan sold some of its U.S. treasuries to fund its August intervention. Holdings of U.S. treasuries decreased by $26.4 billion in June, bringing total holdings down to $1.117 trillion. This was the largest single-month sell-off among all countries globally, directly pushing the U.S. 10-year treasury yield up to 4.74%.
Debt pressure is not unique to Japan, as it is part of a global trend of debt readjustment, with one of the main contradictions originating in the U.S.
The Illusion of Bitcoin's Decoupling
Amidst the above macroeconomic turmoil, Bitcoin has remained largely unaffected, with the price holding above $78,700. This resilience poses a challenge to the traditional "risk-on" logic. The key question is: is this a true market decoupling or a temporary illusion before the storm?
The pessimistic scenario is clear: if the Bank of Japan significantly raises rates and the yen strengthens, unwind of carry trades will trigger global risk asset deleveraging.
During the August 2024 sell-off, Bitcoin was highly correlated with the Japanese stock market, proving that Bitcoin cannot stay out of such events. Additionally, as Japanese yields rise and returns on interest-bearing assets increase, the attractiveness of Bitcoin, which does not generate interest, will diminish in comparison.
The optimistic scenario presents another possibility. If the yen continues to depreciate, Bitcoin will become an attractive safe haven option for Japanese investors.
This is not purely theoretical. Ray Dalio believes that Japan's debt situation underscores Bitcoin's value as a portfolio asset, recommending a small allocation to Bitcoin and allocating 10-15% of assets to gold.
Japanese institutional involvement is also increasing. For example, Nomura's crypto subsidiary, Laser Digital, obtained Japan's first new crypto exchange platform license in four years. Nomura's research shows that 79% of respondents plan to invest in Bitcoin in the next three years.
Japan's revised Financial Instruments and Exchange Act has reclassified cryptocurrency as a financial product, which is expected to pave the way for the launch of spot crypto ETFs in 2027, along with accompanying independent tax rules. The Japan Exchange Group may be the first to launch a crypto spot ETF as early as 2027.
While the regulatory framework is becoming clearer, macro-level pressures are also continuing to build.
September Policy Shift Window
The Bank of Japan's next policy meeting is scheduled for September 17-18. Most institutions predict a rate hike to 1.25%.
The bond market is fully pricing in expectations, but Bitcoin may not necessarily fully absorb it. What is truly concerning is not the rate hike itself, but the central bank's indication of future policy constraints.
If the Bank of Japan signals that 1% is just a transitional phase towards a 2% rate, the yen will rapidly strengthen, triggering a massive unwinding of carry trades. Conversely, if the statement reflects concerns about debt sustainability limiting the rate hikes, the yen will further weaken, and Bitcoin is expected to benefit from a weaker dollar and domestic demand from Japan.
The yield levels of 1996 should be viewed as a risk warning signal, not a market-driving factor. What truly dictates the market is the direction of the yen, not a specific exchange rate number. Currently, the yen is depreciating, and Bitcoin is rising. Once the September Bank of Japan meeting alters the market's mainstream expectations, this correlation may abruptly reverse.
The prevailing market pricing is that Japan's debt issue will evolve slowly and not collapse suddenly. Bitcoin investors are not waiting for the carry trade to reverse but are already trading on expectations of a weakening yen and continued institutional inflows.
This logic has a possibility of being valid, but it still needs to be viewed cautiously in conjunction with the historical norms of Japanese interest rates. For the first time in thirty years, the 30-year government bond yield is approaching 4%, which will undoubtedly have profound market impacts.
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