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The cost of borrowing money in Japan has hit a high not seen since 1996. On the same morning, the 30-year yield hit 4.185%, and the 10-year government bond yield hit 2.945%.
This is a huge shift for a country that has spent a lot of time fighting deflation with negative interest rates.
Meanwhile, Bitcoin's price has soared 22% in the last week, reaching $80,000 for the first time since May. The central theme is the contrast between the volatile bond market in Japan and the relatively calm crypto sector.
The Carry Trade Arithmetic
Over the course of several years, the yen carry trade was a major factor propelling the world's risk markets.
Investors converted their cheaply borrowed yen into dollars and used them to buy assets with better returns.
Offshore non-banks received about $250 billion in yen loans from the Bank for International Settlements, with more extensive measures totaling about $500 billion.
That's a lot of leverage depending on one assumption: that Japanese rates will stay at zero. This disproves that earlier assumption.
June saw the highest policy rate in 31 years, at 1.0%, set by the Bank of Japan.
During the meeting on September 17–18, the markets are expecting an additional hike. The monetary exceptionalism of the past 30 years is unraveling, and the 10-year yield of 2.88% is more than simply a statistic.
Carry positions can turn into a loss-maker in a flash when the yen surges.
According to Goldman Sachs' Praneet Shah, "your complete annualized carry has been completely erased" with just one action.
The effects were shown in August 2024: Bitcoin started at around $64,600 and fell to $49,000 on August 5 due to the increase in the yen. In the span of a single trading session, Tokyo's TOPIX fell by a substantial 12%.
The arrangement is different now.
Reversing over half of the gains earned through recent intervention measures this month, the yen is currently facing a dip, trading at roughly 159 per dollar.
Conditions for carry trades are made more attractive by a weak yen. Its present fortification by the Bank of Japan is a cause for concern.
The Debt Cliff
At the end of June, Japan's national debt reached an unprecedented ¥1,346 trillion ($9.1 trillion), setting a new record. The government expects its debt to hit ¥1,492 trillion by the end of the current fiscal year.
Prime Minister Sanae Takaichi's decision to lower the consumption tax to 1% for two years beginning in April 2027 brings forth an extra ¥5 trillion in unallocated spending.
This creates a complex dilemma: Japan needs higher interest rates to stabilize the yen and address inflation; however, raising rates also increases the burden of servicing its substantial debt.
The decision by the BOJ to slow down the bond purchase tapering beginning in April 2027 highlights a focus on maintaining market stability over the rapidity of normalization.
However, the bond market is presently reflecting a notable absence of confidence.
Japan financed a portion of its August intervention through the sale of US Treasuries, resulting in a decrease of $26.4 billion in holdings in June, bringing the total to $1.117 trillion.
That represents the largest monthly decline by any country, leading to the 10-year Treasury yield hitting 4.74%.
This narrative extends beyond Japan; it encompasses a global trend in debt reduction with an underlying theme originating from the United States.
The Bitcoin Decoupling
Bitcoin has remained unaffected by all of this. At over $78,700, it is demonstrating a level of resilience that challenges the prevailing "risk-on" narrative.
The question at hand revolves around whether this represents a separation or merely a precursor.
The negative case is well-defined: if the central bank raises interest rates significantly and the yen strengthens, the carry trades might be unwound, which would deleverage risk assets around the world.
It is clear that Bitcoin is not immune to market fluctuations, given its correlation with the Nikkei during the August 2024 selloff.
A rise in Japanese yields would make yield-generating assets more attractive than Bitcoin, which does not yield any interest.
The best-case scenario is the optimistic one.
Bitcoin might become an attractive safe haven for Japanese investors if the yen continues to decline in value.
Nothing here is theoretical. Ray Dalio thinks that the Japanese debt numbers prove that Bitcoin is a good investment, and he suggests a small allocation to Bitcoin and 10-15% in gold.
Institutional investors in Japan are getting increasingly involved; for example, Nomura's crypto arm, Laser Digital, just got the country's first new crypto exchange license in four years.
The majority of respondents (79%) plan to invest in Bitcoin within the next three years, according to Nomura's poll.
Cryptocurrency has been reclassified as a financial product in Japan's revised Financial Instruments and Exchange Act, which might lead to the launch of spot ETFs and separate taxes in 2027.
Potential listing of spot cryptocurrency ETFs on the Japan Exchange Group could happen as early as 2027.
The advent of clear regulations coincides with the heightening of macroeconomic pressures.
The September Pivot
On September 17th and 18th, the Bank of Japan will hold its next scheduled meeting.
Most experts are predicting a hike to 1.25%.
Bitcoin, on the other hand, might not completely absorb expectations, but the bond market does. Not the hike in interest rates per se, but the dialogue around possible future limitations is the real cause for alarm.
The rapid unwinding of carry trades could be caused by a sharp yen appreciation if the BOJ suggests that 1% is just a stepping stone to 2%.
Bitcoin might benefit from a weak dollar and local demand, while the yen could fall more if it shows that worries about debt sustainability would limit further growth.
Rather than being a driving force, the yield level from 1996 should be seen as a warning indicator.
The direction, not the value, of the yen will be the driving force. The yen is falling in value right now while Bitcoin is rising in value.
If the prevalent narrative is changed at the forthcoming September meeting of the BOJ, that correlation could shift abruptly.
The market seems to be assuming that the debt crisis in Japan will play out over time rather than suddenly sending prices tumbling.
Bitcoin investors aren't waiting for carry trades to reverse; they're preparing for a weakening yen and more institutional investment.
Though it could be true, it needs to be carefully considered in light of the historical background of Japanese rate variations. There will definitely be major effects when thirty-year yields approach 4% for the first time in a generation.
Blockhead
