Japanese authorities and the Bank of Japan (BOJ) are currently implementing policies that work in directly opposite directions. This is a rare and dangerous situation: monetary tightening, central bank balance sheet reduction, and simultaneous expansion of fiscal spending create a unique structure fraught with serious consequences for global markets and cryptocurrencies.
Policy Paradox: Tightening and Stimulation Simultaneously
Minister Katayama stated Japan's intention to increase the investments of the world's largest public pension fund, GPIF ($1.5 trillion in assets), in domestic assets. Currently, about half of GPIF's portfolio is in foreign stocks and bonds. Even a small shift of the fund toward Japan, according to analysts, could pull real money out of U.S. government bonds and stocks, directing it home. Given GPIF's scale, such a shift of a few percentage points could move global debt markets.
At the same time, inflation data was published. 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 (6.3%). Logically, accelerating inflation and a major fund preparing to buy bonds should push yields higher.
However, the market reacted differently: the yield on 10-year Japanese Government Bonds (JGBs) fell by 10 basis points to 2.775%, and the 20-year yield also fell by 10 b.p. 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.
Pressure from the BOJ and the Tax Plan
Additional pressure comes from the Bank of Japan itself. The regulator is reducing its own balance sheet — by approximately $502 billion from its 2024 peak, to $4.33 trillion. The fewer purchases by the BOJ, the more bond supply the market must absorb on its own, precisely when the government plans to increase debt.
A new tax plan fits into this context. Japan plans 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 more government spending through new bond issuances — exactly at the moment when the BOJ is stepping back from its role as the buyer of last resort.
Carry Trade Threat and Risks for the Crypto Market
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. The BOJ rate is forecast to 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. According to analysts, the volume still ranges from $4 to $8 trillion. Earlier this year, Japan spent $72-73 billion to "defend" the yen, yet 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
The situation in Japan is a classic example of how macroeconomic uncertainty creates ideal conditions for sharp movements across all markets, including cryptocurrency. Investors should closely monitor the dynamics of the USD/JPY pair and JGB yields: a repeat of the August 2024 events could trigger another Bitcoin correction, especially given the current high correlation of digital assets with traditional risk instruments. I recommend factoring increased volatility into your strategies and considering hedging positions against a sudden yen strengthening.