Discord in Japanese Politics: A Unique Threat to Global Markets and Bitcoin
Japan has found itself at the epicenter of a rare macroeconomic paradox. The government and the Bank of Japan (BOJ) are simultaneously pursuing mutually exclusive policies, creating unique risks for global financial markets and, in particular, for Bitcoin.
Analysts note that while the BOJ is tightening monetary policy and reducing its balance sheet, the government is increasing budget spending and preparing large-scale tax breaks. This dissonance has no parallel in the country's modern history.
The Fiscal and Monetary Policy Paradox
Finance Minister Katayama announced plans to force the world's largest public pension fund, GPIF (with $1.5 trillion in assets), to increase investments in domestic assets. If the fund shifts its focus from foreign stocks and bonds toward Japanese ones by even a few percentage points, it will trigger a capital outflow from U.S. markets and a redistribution of funds back home. Such a shift could move global debt markets.
At the same time, inflation data was released: the Producer Price Index (PPI) accelerated to 7.1% year-on-year, exceeding forecasts of 6.8% and the previous 6.3%. Logic suggests that rising 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 the 20-year yield dropped 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 the New Tax Plan
Additional pressure is coming from the BOJ itself. The regulator is reducing its balance sheet by approximately $502 billion from its 2024 peak to $4.33 trillion. The fewer purchases the central bank makes, the more bond supply the market must absorb on its own. And this is happening precisely when the government plans to increase debt.
The new tax plan exacerbates the situation. Japan intends to reduce the consumption tax on food from 8% to 1% starting in April 2027, and redistribute the remaining 1% (about 600 billion yen per year) as direct payments to the poor. Each such step means an increase in government spending through new bond issuances—exactly at a time when the BOJ is stepping back from its role as the buyer of last resort.
What This Means for Global Markets
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's 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 of this strategy still ranges from $4 to $8 trillion. Earlier this year, Japan spent $72–73 billion to "defend" the yen, but the USD/JPY pair still reached 162—a 40-year high.
Analysts recall the precedent of August 2024, when a BOJ rate hike of just 0.15% triggered a rapid unwinding of the carry trade: the Nikkei index fell more than 12% in a single session, and Bitcoin crashed from around $65,000 to under $50,000 in less than a week due to massive margin calls on leveraged positions.
Currently, the USD/JPY pair dropped by a full yen in a matter of minutes amid falling yields and accelerating PPI. If Japan begins to repatriate capital while simultaneously trying to stabilize the yen, it could undermine one of the world's largest sources of liquidity.
My analysis: The current situation in Japan is a classic example of a conflict between fiscal and monetary policy, which rarely ends well. For cryptocurrencies, this means increased volatility and the risk of sharp corrections, especially if the BOJ is forced to act more decisively. Investors should closely monitor the dynamics of the USD/JPY pair—it could become a trigger for another collapse in risky assets.