Japan has found itself at the epicenter of a unique macroeconomic paradox. The country's government and the Bank of Japan (BOJ) are pursuing diametrically opposite courses, creating a volatile mix for global financial markets, including cryptocurrencies. The analytical service Bull Theory has recorded an unprecedented situation: authorities are simultaneously tightening monetary policy, reducing the central bank's balance sheet, and increasing budget spending. Such a combination has never been seen in Japan's modern history.
Giant Pension Fund Changes Course
Minister Katayama outlined a new strategy: the world's largest public pension fund, GPIF, with assets of $1.5 trillion, along with other state funds, are increasing investments in domestic assets. Currently, about half of GPIF's portfolio consists of foreign stocks and bonds. Even a minor shift by the fund towards Japan, according to Bull Theory, will pull real money out of U.S. government bonds and stocks, directing it home. A fund of this scale can move global debt markets with a shift of just a few percentage points.
Inflation Beats Forecasts, but Yields Fall
At the same time, fresh inflation data has been published. Japan's Producer Price Index (PPI) accelerated to 7.1% year-on-year, against a forecast of 6.8% and 6.3% the previous month. Logically, accelerating inflation and a major fund preparing to buy bonds should push yields higher. However, the opposite occurred: the yield on 10-year Japanese Government Bonds (JGBs) fell by 10 basis points to 2.775%, and 20-year yields also dropped by 10 bps to 3.765%. The market remains extremely sensitive after the crisis of January 2026, when the yield on 40-year JGBs exceeded 4% for the first time.
BOJ Exits the Market, Government Increases Debt
Additional pressure comes from the Bank of Japan itself. According to Bull Theory, the regulator is reducing its own balance sheet — by approximately $502 billion from its 2024 peak, to $4.33 trillion. The fewer purchases the BOJ makes, the more bond supply the market must absorb on its own, precisely when the government plans to increase debt. This is compounded by a new tax plan: Japan intends to reduce the consumption tax on food from 8% to 1% starting in April 2027, redistributing the remaining 1% (about 600 billion yen per year) as direct payments to the poor. Each such step means more government spending financed by new bond issuances — exactly at the moment when the BOJ is stepping back from its role as the buyer of last resort.
Carry Trade in the Crosshairs
The yen carry trade poses a particular danger, where global funds borrow cheap JPY to buy higher-yielding assets abroad. According to Bull Theory, the volume still ranges from $4 to $8 trillion. Earlier this year, Japan spent $72–73 billion on "defending" the yen, yet the USD/JPY pair still reached 162 — a 40-year high. There is already a precedent: in August 2024, a BOJ rate hike of just 0.15% triggered a rapid unwinding of the carry trade. The Nikkei index fell over 12% in a single session, and Bitcoin crashed from around $65,000 to below $50,000 in less than a week due to massive margin calls on leveraged positions.
Analyst Crypto Rover noted similar risks. According to him, the USD/JPY pair dropped by a full yen in a matter of minutes amid falling yields and accelerating PPI. He emphasized that if Japan starts repatriating capital while simultaneously trying to stabilize the yen, it could undermine one of the world's largest sources of liquidity. Japan's debt market is under pressure, inflation is accelerating, and the yen is hovering near 40-year lows. In such a situation, the Bank of Japan has fewer and fewer simple solutions.
My analysis: The simultaneous tightening of policy, balance sheet reduction, and rising budget spending create an unprecedented and dangerous structure for global markets. Investors, especially in cryptocurrencies, should prepare for increased volatility: any unexpected move by the BOJ could trigger a new wave of liquidations, similar to August 2024. Japan is not just a regional risk but a systemic factor capable of upending the entire global financial architecture.