The yen is on the verge of a 40-year low: a hidden threat to bitcoin and altcoins
The Japanese yen has come very close to the psychologically important level of 161 against the US dollar. If broken, this level would update the low set back in 1986. Notably, neither the Bank of Japan's (BOJ) monetary policy tightening nor Tokyo's large-scale currency interventions can stop the prolonged decline of the national currency. The situation is becoming critical.
The Monetary Policy Paradox: Rates Rise, Yen Falls
On June 16, the BOJ raised its key interest rate by 0.25 percentage points to 1% — the highest level since 1995. The formal reason was inflation, which accelerated due to expensive raw materials amid geopolitical risks. The regulator warned that core inflation risks settling above the 2% target. However, even this seemingly aggressive step could not reverse the global trend.
The key problem is the colossal interest rate gap between Japan and the United States. The Federal Reserve kept rates at a high level and hinted at the possibility of additional rounds of tightening. Under these conditions, the dollar has strengthened significantly, while the yen continues to weaken. Traditional interventions no longer work: in May, Tokyo spent about $73.5 billion on a large-scale yen purchase, but the effect was only short-term. This is a classic trap: Japan's sovereign debt is many times larger than its GDP, so a sharp rate hike would make its servicing unaffordable. The BOJ is forced to act extremely cautiously.
Carry Trade and Its Impact on the Crypto Market
The main channel of influence on digital assets is the popular arbitrage on interest rate differences — the carry trade. Investors massively open short positions on the yen, borrowing cheap yen, converting them into dollars, and investing in high-yield instruments, including tech stocks and cryptocurrencies. This scheme works flawlessly as long as the yen weakens.
Historically, every notable BOJ rate hike since 2024 has resulted in a deep 20–32% drawdown for Bitcoin. The June 16 meeting also pushed the crypto market flagship down, but the decline was contained thanks to the overall weakness of the yen and a significant deal between the US and Iran regarding the Strait of Hormuz. As a result, the decline was just over 1%.
Systemic Risk: An Inevitable Crash?
This local resilience harbors the main threat. While the yen steadily weakens and the regulator hesitates, arbitrage trading continues to fuel the markets. For digital assets, this is temporary support. However, if the yen sharply strengthens or the BOJ suddenly accelerates its pace, a massive forced closure of carry trade short positions will occur. Such a unwinding of positions in August 2024 already caused panic selling on exchanges, with Bitcoin plummeting alongside stock indices.
My analysis: The longer this imbalance accumulates, the more devastating the inevitable crash of cryptocurrencies and global stocks will be. Investors should prepare for a scenario of a sharp yen strengthening, which could trigger a 30–40% correction in Bitcoin in the short term.