Japan has entered a phase of unprecedented macroeconomic dissonance. The country's government and the Bank of Japan (BOJ) are simultaneously implementing measures that not only fail to complement each other but directly contradict one another. This lack of coordination creates an extremely volatile environment for traditional markets and cryptocurrencies, including Bitcoin.
On one hand, we are witnessing monetary tightening: the BOJ is reducing its balance sheet (by $502 billion from the 2024 peak, to $4.33 trillion) and raising interest rates. On the other hand, fiscal authorities are increasing budget spending and preparing a tax reform that proposes reducing the tax on food products from 8% to 1% starting in April 2027. The resulting revenue shortfall (about 600 billion yen per year) is planned to be offset by direct payments to low-income individuals. This is a classic expansionary fiscal stimulus that boosts the economy, while the BOJ is trying to cool it down.
Where are markets heading?
Against this backdrop, contradictory signals are emerging. Japan's Producer Price Index (PPI) accelerated to 7.1% year-on-year, exceeding forecasts of 6.8%. Logic suggests that under such conditions, bond yields should rise. However, we are seeing the opposite: 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 January 2026 crisis, when the yield on 40-year JGBs exceeded 4% for the first time.
The BOJ itself is adding further pressure. By reducing its bond purchases, it is shifting the burden of absorbing new issuances onto the market. And this is happening precisely at a time when the government plans to increase debt to finance new social programs. Each such step means an increase in JGB supply amid declining demand from the central bank.
Threat to carry trade and Bitcoin
The Japanese carry trade poses a particular danger. Global funds continue to borrow cheap yen to purchase high-yield assets abroad. The volume of this market is still estimated at $4-8 trillion. Meanwhile, Japan has already spent $72-73 billion on "defending" the yen this year, but the USD/JPY pair still reached a 40-year high of 162.
There is already a precedent: in August 2024, a mere 0.15% rate hike by the BOJ triggered a sharp unwinding of the carry trade. The Nikkei crashed more than 12% in a single session, and Bitcoin lost nearly 25% in a week—from $65,000 to less than $50,000—due to mass margin calls on leveraged positions.
The situation is now even more tense. Japan's debt market is under pressure, inflation is accelerating, and the yen is hovering near multi-year lows. The BOJ has increasingly less room for maneuver.
Cryptalist analytical conclusion: The simultaneous tightening of monetary policy, the reduction of the central bank's balance sheet, and the rise in budget spending create a unique macroeconomic structure. In this environment, any unexpected move by the BOJ—even a minimal rate hike—could trigger a new wave of carry trade liquidations, which would instantly impact all risk assets, including Bitcoin. Investors should closely monitor the dynamics of USD/JPY and JGB yields as key indicators of global risk appetite.