While all attention is focused on the Fed's actions, the real tectonic plate ready to shift global markets is in Japan. The economy of the Land of the Rising Sun is cracking at the seams across three fundamental fronts: unprecedented tightening by the Bank of Japan, a collapse of the national currency, and a demographic catastrophe. It is this combination, not another move by the US, that is highly likely to trigger the next global market shock.
Tightness Not Seen in 30 Years
The Bank of Japan is conducting the most aggressive balance sheet reduction in its history. In the quarter ending June 30, the regulator withdrew 23.5 trillion yen (about $146 billion) from the market — a record quarterly figure for the entire cycle. From its peak in 2024, the balance sheet has been reduced by 116.9 trillion yen (~$726 billion), representing 15.6% of all assets. Now, not only government bonds but also direct sales of exchange-traded funds (ETFs) and J-REIT real estate trusts are being cut. There are no more exceptions.
The government bond market is already showing signs of stress. The yield on 10-year Japanese government bonds (JGBs) has surged to 2.90% — the highest since September 1996. 20-, 30-, and 40-year bonds have set new historical records at 3.89%, 4.03%, and 4.055%, respectively. Inflationary pressure is adding fuel to the fire: the Producer Price Index (PPI) reached 7.1% year-on-year against a forecast of 6.8%, while the key interest rate stands at only 1.0%. High inflation means further rate hikes and continued draining of an already depleted liquidity market.
Yen Under Pressure: Carry Trade and Demographics
The currency front is the second line of defense, and it has already been breached. Despite interventions totaling $72–73 billion this year, the USD/JPY pair holds near the 162 mark, close to the yen's 40-year low. A weak currency is a direct scourge for Japanese companies, which are going bankrupt due to rising import costs. Strengthening the yen would require depleting reserves and raising rates even further, which would inevitably crash the domestic stock market.
Particularly dangerous is the yen carry trade — a strategy where investors borrow cheap yen at near-zero rates and invest them in higher-yielding assets abroad. Estimates suggest its volume still ranges from $4 to $8 trillion. These borrowed funds are invested in US stocks, emerging market debt, and even cryptocurrencies. There is already a precedent: in August 2024, a mere 0.15% rate hike triggered a unwinding of the carry trade, crashing the Nikkei index by 12.4% in a single session — the worst day since 1987.
The Demographic Time Bomb
The third and perhaps most intractable problem is demographics. In 2025, only 671,236 children were born in Japan — the lowest since 1899. The fertility rate has fallen to 1.14, well below the replacement threshold of 2.1. For the second consecutive year, deaths exceed births by 900,000, and the population has shrunk from 128 million to approximately 123 million. Nearly 29% of the country's residents are over 65.
Debt is growing, while the workforce needed to service it is disappearing. Japan's debt-to-GDP ratio stands at 204.4% — the highest in the world. The central bank is draining liquidity, bond yields are at 30-year highs, the currency is collapsing, and future taxpayers are simply not being born.
Cryptalist Comment: For the crypto market, this means a potential perfect storm. A sharp unwinding of the carry trade in the event of another BoJ rate hike could trigger a simultaneous outflow of liquidity from all risky assets, including bitcoin and altcoins. Investors should closely monitor Bank of Japan meetings — that is where the signal for a global correction may come from, rather than from the usual US macroeconomic reports.