Japan has found itself at the epicenter of a unique and extremely dangerous contradiction for markets. The country's government and the Bank of Japan (BOJ) are moving in directly opposite directions. We are witnessing a simultaneous tightening of monetary policy, a reduction of the central bank's balance sheet, and an increase in budget spending — a combination unprecedented in modern history.
Analytical service Bull Theory emphasizes that against the backdrop of this imbalance, Minister Katayama has called on the world's largest government pension fund, GPIF (assets of $1.5 trillion), and other state funds to increase investments in national assets. Currently, about half of GPIF's portfolio is in foreign stocks and bonds. Even a slight shift of the fund towards Japan, according to expert estimates, will pull real money out of U.S. government securities 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 data only adds to the tension. Japan's 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%. Logic suggests that accelerating inflation and a large fund preparing to buy bonds should push yields higher. However, the market showed the opposite: 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.
Double Squeeze: BOJ Exits, Government Increases Debt
Additional pressure is being created by the Bank of Japan itself. According to Bull Theory, the regulator is actively 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. The situation is exacerbated by a new tax plan: Japan intends to reduce the consumption tax on food 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 new bond issuances to finance government spending — 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. Global funds borrow cheap JPY to buy higher-yielding assets abroad. The volume of this carry trade, according to Bull Theory estimates, 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. 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 more than 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.
Expert Opinion
I assess the current situation as one of the most explosive for global markets in 2026. The simultaneous tightening of BOJ policy, the reduction of its balance sheet, and the growth in budget spending create an unprecedented structure. Japan's debt market is under pressure, inflation is accelerating, and the yen is stuck near 40-year lows. The BOJ has fewer and fewer easy solutions left. 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. For Bitcoin and other risk assets, this means increased volatility and the risk of a repeat of the August 2024 crash. The market must be prepared for any scenario.