Author: Ashrith Rao, Blackhead
Compiled by: Saoirse, Foresight News
Domestic borrowing costs in Japan have reached highs not seen since 1996. On the same morning, the yield on 30-year government bonds reached 4.185%, and the 10-year bond yield was reported at 2.945%.
For a country that has long relied on negative interest rates to combat deflation, this represents a significant paradigm shift.
Meanwhile, Bitcoin surged 22% over the past week, breaking above $80,000 for the first time since May. The core contradiction this article explores is this: while the Japanese bond market is experiencing severe volatility, the cryptocurrency market appears relatively resilient.
The Underlying Logic of the Carry Trade
For several years, the yen carry trade has been a significant force driving global risk asset markets. Investors borrow low-cost yen, convert it to US dollars, and then purchase higher-yielding assets of various kinds.
According to data from the Bank for International Settlements, offshore non-bank institutions hold approximately $250 billion in yen-denominated loans; using a broader statistical measure, this figure could reach $500 billion. This enormous leverage was built on a core premise: Japanese interest rates would 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%, the highest level in 31 years.
The market widely expects another rate hike at the policy meeting on September 17-18. Japan's unique monetary environment of the past three decades is disintegrating. A 10-year government bond yield of 2.88% is far from just a cold number. If the yen appreciates rapidly, carry trade positions could turn from profit to loss in an instant.
Praneet Shah of Goldman Sachs stated: "A mere move in the exchange rate could completely wipe out the annualized returns of the entire position."
This scenario played out in August 2024: influenced by yen appreciation, Bitcoin fell from around $64,600 to $49,000 on August 5th. The Tokyo Stock Price Index (TOPIX) plunged 12% in a single trading day.
But the situation is different now.
This month, the yen has given back more than half of the gains from the currency intervention and is currently in a weakening phase, trading around 159 against the US dollar. A weaker yen would rekindle the attractiveness of the carry trade, making the Bank of Japan's subsequent policy moves regarding the yen worthy of high vigilance.
The Debt Cliff
At the end of June, Japan's national debt reached a record high of 1,346 trillion yen (equivalent to $9.1 trillion USD). The Japanese government expects the debt level to climb to 1,492 trillion yen by the end of this fiscal year. Prime Minister Sanae Takaichi announced a reduction in the consumption tax to 1% from April 2027 for two years, which will create a new fiscal shortfall of 5 trillion yen.
This creates a thorny dilemma: Japan needs higher interest rates to stabilize the yen and curb inflation; but raising rates would significantly increase the interest burden on its massive debt.
The Bank of Japan announced that starting from April 2027, it will slow the pace of reducing its bond holdings, indicating that policy prioritizes market stability over rapid monetary policy normalization. Even so, the bond market has clearly shown a lack of confidence.
Japan sold part of its US Treasury holdings to fund its currency intervention in August. Its holdings of US Treasuries decreased by $26.4 billion in June, with total holdings falling to $1.117 trillion. This was the largest single-month reduction among all countries globally, directly pushing the yield on the US 10-year Treasury note up to 4.74%.
Debt pressure is not unique to Japan; it reflects a broader global trend of debt adjustment, with one of the sources of the contradiction lying in the United States.
The Illusion of Bitcoin's Decoupling
Amid all these macro-level upheavals, Bitcoin remains largely unaffected, with its price holding firmly above $78,700. This resilience challenges the traditional logic of "risk sentiment." The key question is: Is this a genuine market decoupling, or merely a brief illusion before the storm hits?
The pessimistic scenario has clear logic: If the Bank of Japan raises rates significantly and the yen strengthens, concentrated unwinding of carry trades could trigger deleveraging across global risk assets.
The sell-off in August 2024 showed that Bitcoin moved in high correlation with Japanese stocks, proving that Bitcoin cannot remain detached. Furthermore, as Japanese yields rise, yield-bearing assets become more attractive, potentially diminishing the appeal of Bitcoin, which itself generates no interest.
The optimistic scenario presents another possibility. If the yen continues to depreciate, Bitcoin could become an attractive hedging option for Japanese investors.
This is not purely theoretical speculation. Ray Dalio believes Japan's debt situation validates Bitcoin's value as an asset allocation, suggesting a small allocation to Bitcoin alongside a 10-15% allocation to gold.
Participation by Japanese institutions is also steadily increasing. For example, Laser Digital, the crypto subsidiary of Nomura, secured Japan's first new crypto exchange license in four years. Nomura's survey shows that 79% of respondents plan to invest in Bitcoin within the next three years.
Japan's revised Financial Instruments and Exchange Act has already reclassified cryptocurrency as a financial product, which is expected to pave the way for spot crypto ETFs by 2027, accompanied by separate tax rules. Japanese exchange groups could potentially launch spot crypto ETFs as early as 2027.
While the regulatory framework is becoming clearer, macro-level pressures are also accumulating.
The September Policy Pivot Window
The Bank of Japan's next policy meeting is scheduled for September 17-18. Most institutions predict the rate will be raised to 1.25%.
The bond market will fully price in expectations, but Bitcoin may not fully digest them. What truly warrants caution is not the rate hike itself, but the central bank's communication regarding future policy constraints.
If the Bank of Japan signals that the 1% rate is merely a stepping stone towards a 2% rate, the yen will likely strengthen rapidly, leading to large-scale unwinding of carry trades. Conversely, if its communication reflects concerns that debt sustainability will limit the scope for further hikes, the yen could weaken further, and Bitcoin might benefit from a softer dollar and local Japanese buying.
The yield levels of 1996 should be viewed as a risk warning signal, not a market driver. What truly dominates the market is the direction of the yen's movement, not a specific exchange rate number. Currently, the yen is depreciating while Bitcoin is rising. If the September Bank of Japan meeting shifts the market's dominant expectations, this correlation could suddenly reverse.
The current mainstream market pricing assumes Japan's debt issues will evolve slowly, without a sudden crash. Bitcoin investors are not passively waiting for a reversal in carry trades; they are already trading on expectations of a weaker yen and sustained institutional fund inflows.
This logic has the potential to hold, but it still needs to be viewed cautiously in light of the historical patterns of Japanese interest rates. For the first time in thirty years, the 30-year bond yield is approaching 4%, an event that will inevitably have profound market implications.
