The yen is on the verge of a historic low: how the weakening of the Japanese currency will reshape the crypto market
The Japanese yen has come extremely close to the psychologically important level of 161 against the dollar, teetering on the brink of renewing the 40-year low recorded back in 1986. The current dynamics demonstrate the national currency's astonishing resilience to any stabilization attempts — neither monetary policy tightening nor Tokyo's record currency interventions can stop the prolonged decline.
The Vicious Circle of Interest Rates
The root of the problem lies in the fundamental divergence of monetary policy courses among global central banks. On June 16, the Bank of Japan raised its key interest rate by 0.25 percentage points to 1% — the highest level since 1995. The formal reason was inflation, driven up by expensive raw materials amid the Middle East conflict. The regulator warned that core inflation risks settling above the target 2%.
However, even this decision could not reverse the global trend. Simultaneously, the U.S. Federal Reserve kept its rate at the previous high level; moreover, the American leadership hinted at possible additional rounds of tightening this year. As a result, the rate gap between Japan and the U.S. remains critically wide, continuing to exert strong pressure on the yen.
Interventions as a Temporary Measure
Traditional currency interventions no longer save the situation. In May, Tokyo spent about $73.5 billion on a massive purchase of the national currency. Despite the colossal costs, the yen very quickly returned to its decline. At this point, a dangerous trap becomes evident: Japan's sovereign debt is many times larger than its GDP, so a sharp rise in rates dramatically increases the cost of servicing obligations. For this reason, the Bank of Japan is forced to act extremely cautiously. It is obvious that the modest increase to 1% was not enough for the sophisticated market.
Direct Impact on the Crypto Market
The main channel of influence on digital assets is the popular arbitrage on interest rate differences (carry trade). The yen is steadily under severe pressure due to the activity of major players. Investors are massively opening short positions on the yen, taking advantage of the huge yield gap between Japan and the U.S. The scheme looks extremely simple: obtaining cheap loans in Japanese yen, converting the funds into American currency, investing the capital in high-yield instruments, including tech stocks and cryptocurrencies.
The high sensitivity of the bitcoin exchange rate to this factor has been proven by history. Every notable rate hike by the Bank of Japan, starting from 2024, resulted in a deep drawdown for the crypto market flagship within the range of 20–32%. The meeting held on June 16 also pushed bitcoin down. Nevertheless, this time, the strong decline was restrained by the overall weakness of the yen and an important deal between the U.S. and Iran regarding the Strait of Hormuz. As a result, the decline was limited to only a symbolic drop of just over 1%.
A Ticking Time Bomb
However, it is precisely in this local stability that the main systemic risk lies. While the Japanese currency systematically weakens and the regulator hesitates, arbitrage trading continues to fuel the markets. For digital assets, the current situation serves as temporary support. Conversely, if the yen sharply rises or the central bank suddenly accelerates its pace, there will be a massive forced closure of short positions. Such a unwinding of carry trade positions in August 2024 already caused a panic sell-off on exchanges. At that time, bitcoin fell rapidly along with stock indices.
My analysis: The longer this imbalance accumulates, the more devastating the inevitable collapse of cryptocurrencies and global stocks will be. Investors should closely monitor the actions of the Bank of Japan — any unexpected move could trigger a massive liquidation of positions and crash the market with a force comparable to the events of August 2024.