The government and the Bank of Japan (BOJ) have entered a phase of acute dissonance, pursuing directly opposite courses of action. Analysts are recording a unique situation: tightening monetary policy, reducing the central bank's balance sheet, and simultaneously increasing budget spending — no such precedent exists in Japan's modern history.
The GPIF Factor and the Inflation Paradox
Minister Katayama announced the intention to stimulate the world's largest public pension fund, GPIF (assets of $1.5 trillion), and other state funds to increase investments in domestic assets. Currently, about half of GPIF's portfolio consists of foreign stocks and bonds. Even a small shift by the fund towards Japan, as analysts note, would pull real money out of US 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.
Simultaneously, fresh inflation data was published. The Producer Price Index (PPI) accelerated to 7.1% year-on-year, exceeding the forecast of 6.8% and the previous month's figure of 6.3%. Logically, accelerating inflation and a large fund preparing to buy bonds should have pushed 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 fell 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.
Pressure from the BOJ and Fiscal Risks
Additional pressure comes from the Bank of Japan itself. 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.
A new tax plan is also woven into this. Japan plans to reduce the consumption tax on food products from 8% to 1% from April 2027, and redistribute the remaining 1% (about 600 billion yen per year) as direct payments to the poor. Each such step means more government spending through new bond issuances — exactly at the moment when the BOJ is stepping back from its role as the buyer of last resort.
Carry Trade and the Threat to Cryptocurrencies
The essence of the contradiction is that the measures work in opposite directions. Raising rates should slow the economy and support the yen, while tax cuts and cash payments, on the contrary, stimulate it. According to forecasts, the BOJ rate will approach 1.5% by 2027 — a multi-decade high.
The yen carry trade poses a particular danger, where global funds borrow cheap JPY to buy higher-yielding assets abroad. The volume still stands between $4 and $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.
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 roughly $65,000 to below $50,000 in less than a week due to massive margin calls on leveraged positions.
Analysts agree that the simultaneous tightening of policy, balance sheet reduction, and increase in budget spending create an unprecedented and dangerous structure for global markets.
My professional opinion: The market is clearly underestimating the depth of Japan's imbalance. If the BOJ continues tightening and the government continues fiscal stimulus, we could see a repeat of the August 2024 scenario, but with far more serious consequences. For bitcoin, this means a high probability of a sharp correction, especially if a mass unwinding of carry trade positions begins. I recommend investors closely monitor the dynamics of USD/JPY and JGB yields — these are the key indicators for the coming weeks.