Japan's economic ship is listing more and more to one side. The country's government and the Bank of Japan (BOJ) are pulling the helm in different directions, creating a highly dangerous combination for global markets, including the cryptocurrency market. We are witnessing a unique situation: the regulator is tightening monetary policy while simultaneously reducing its balance sheet, even as fiscal authorities prepare to increase government spending and issue new debt obligations.
The key trigger is rising inflationary pressure. Japan's Producer Price Index (PPI) accelerated to 7.1% year-on-year, exceeding both forecasts (6.8%) and previous readings. Logic would suggest this should push government bond (JGB) yields higher. However, the market reacted paradoxically: the yield on 10-year bonds fell by 10 basis points to 2.775%, and the yield on 20-year bonds dropped to 3.765%. This indicates extreme nervousness and persistent demand for "quality" even amid tightening.
A far more alarming signal comes from the BOJ's own actions. The regulator is consistently reducing its balance sheet, which has already shrunk by approximately $502 billion from its 2024 peak, falling to $4.33 trillion. The less the BOJ acts as a buyer of last resort at JGB auctions, the more supply the market must absorb. And this is happening precisely as the government prepares for large-scale fiscal stimulus, including reducing the food tax from 8% to 1% and making direct payments to the poor.
Risk of a Repeat "Carry Trade Collapse"
We have already seen this scenario play out. In August 2024, a BOJ rate hike of just 0.15% triggered a massive unwinding of the carry trade. The Nikkei index plunged over 12% in a single session, and Bitcoin crashed from $65,000 to less than $50,000 within a week due to a cascade of margin calls on leveraged positions.
Currently, the BOJ's rate is projected to approach 1.5% by 2027 — a multi-decade high. Meanwhile, the size of the carry trade is still estimated at $4–8 trillion. The market is extremely sensitive: even a small reversal of capital flows from foreign assets back into Japan, spurred by rising domestic yields, could drain massive amounts of liquidity from the global system.
Analysts rightly note that Japan's debt market is under pressure, inflation is accelerating, and the yen is hovering near 40-year lows. The BOJ has less and less room to maneuver. The combination of policy tightening, balance sheet reduction, and rising budget spending creates a unique and highly dangerous structure for global markets.
My expert opinion: This situation is a classic example of a "liquidity trap" for Japan, which is now being transmitted to the entire world. For the cryptocurrency market, this means increased volatility and the risk of a repeat of the events of August 2024. Investors should closely monitor the USD/JPY pair and JGB yields — any sharp movement in these instruments will trigger a massive sell-off in risk assets.