The yen is on the verge of a 40-year low: a hidden threat to Bitcoin and the entire crypto market
The Japanese yen has come very close to the psychologically significant level of 161 yen per US dollar. Breaking this mark would not just be a technical event, but a renewal of the 40-year low recorded back in 1986. Current dynamics show that neither the Bank of Japan's monetary tightening nor Tokyo's massive currency interventions can reverse the prolonged downtrend.
The key reason for the yen's profound weakness is the critical gap in monetary policy stances between Japan and the United States. At its June 16 meeting, the Bank of Japan raised its key interest rate by 0.25 percentage points to 1% — the highest level since 1995. The formal justification was inflation, which accelerated due to rising commodity prices amid geopolitical risks. The regulator directly warned that core inflation risks settling above the 2% target.
However, this step proved insufficient. While the US Federal Reserve maintains its rate at the previous high level and hints at possible additional rounds of tightening, the yield gap between Japan and America remains enormous. Traditional interventions no longer work: in May, Tokyo spent approximately $73.5 billion on large-scale purchases of the national currency, but the yen very quickly returned to its decline.
This is where the dangerous trap lies, as described by analyst @nicrypto. Japan's national debt is many times larger than its GDP, so a sharp rise in rates instantly makes its servicing more expensive. The Bank of Japan is forced to act extremely cautiously, and the modest increase to 1% was clearly insufficient for the global market.
How does this relate to the crypto market?
The main channel of influence on digital assets is the popular carry trade based on interest rate differentials. Investors are massively opening short positions on the yen, borrowing cheap yen, converting them into dollars, and investing in high-yield instruments, including tech stocks and cryptocurrencies.
Historically, every notable rate hike by the Bank of Japan has resulted in a deep 20–32% drawdown for bitcoin. The June 16 meeting also pushed the crypto market flagship downward, although the decline was contained by the overall weakness of the yen and an important geopolitical deal between the US and Iran.
As long as the yen steadily weakens and the regulator hesitates, carry trade continues to fuel the markets. However, this is temporary support. If the yen sharply appreciates or the central bank suddenly accelerates its pace, a massive forced unwinding of short positions will occur. Such a unwinding of carry trade positions in August 2024 already triggered a panic sell-off on exchanges, with bitcoin rapidly falling alongside stock indices.
My analysis: the current situation is playing with fire. The longer this imbalance accumulates, the more devastating the inevitable crash of cryptocurrencies and global stocks will be. Investors should be prepared for a sharp increase in volatility.