The Japanese government and the Bank of Japan (BOJ) are effectively pursuing mutually exclusive economic policies, creating a uniquely dangerous configuration for financial markets. On one hand, we are witnessing monetary tightening and a reduction of the regulator's balance sheet; on the other, an increase in budget spending and fiscal stimulus. This dichotomy, in my assessment, lays a time bomb under global liquidity, including the digital asset market.
Pension giant turns homeward
The key trigger could be a shift in the course of the world's largest public pension fund, GPIF, with $1.5 trillion in assets. Currently, about half of its portfolio is in foreign stocks and bonds. If the fund begins to repatriate capital, shifting into Japanese assets, it will cause a massive outflow of funds from the markets of the US and other countries. Even a small shift of 1-2% is capable of moving global debt markets.
At the same time, fresh inflation data was released: the Producer Price Index (PPI) accelerated to 7.1% year-on-year, exceeding the forecast of 6.8%. Logic suggests that rising inflation and the fund's preparation for bond purchases should push yields higher. However, reality turned out differently: the yield on 10-year JGBs fell by 10 basis points to 2.775%, and on 20-year bonds to 3.765%. The market remains extremely sensitive after the crisis of January 2026, when the yield on 40-year bonds exceeded 4% for the first time.
BOJ steps aside, government increases debt
The BOJ itself creates additional pressure. The regulator is actively reducing its balance sheet — by approximately $502 billion from the peak of 2024, to $4.33 trillion. The fewer purchases by the central bank, the more bond supply the market has to absorb on its own. And this is happening precisely when the government plans to increase debt. Tax reform adds fuel to the fire: reducing the tax on food products from 8% to 1% from April 2027 and redistributing the lost revenue (about 600 billion yen per year) as direct payments to the poor means even more government spending, which will be covered by new bond issues.
Carry trade in the crosshairs: Bitcoin at risk
The Japanese carry trade poses a particular danger: global funds borrow cheap yen to buy higher-yielding assets abroad. Estimates suggest the volume of these positions still ranges from $4 to $8 trillion. Meanwhile, this year Japan has already spent $72-73 billion on "defending" the yen, but the USD/JPY pair still reached a 40-year high of 162.
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 crashed more than 12% in a single session, and Bitcoin fell from $65,000 to less than $50,000 in less than a week due to massive margin calls on leveraged positions. Now, the risks of a repeat scenario are higher than ever: Japan's debt market is under pressure, inflation is accelerating, and the yen is holding near historical lows.
My expert opinion: The simultaneous tightening of policy, reduction of the central bank's balance sheet, and increase in budget spending create an unprecedented structure for global markets. Investors in Bitcoin and other risky assets should closely monitor the dynamics of the USD/JPY pair — a sharp strengthening of the yen could become the trigger for a new wave of liquidations capable of crashing cryptocurrencies by 20-30% in a matter of days.