Japan's interest rates return to 1996, can Bitcoin withstand the rate hike in September?

Original Title: The 1996 Warning & Crypto Pivot

Original Author: Ashrith Rao, Blackhead

Original Compilation: Saoirse, Foresight News

The borrowing costs in Japan have reached their highest point since 1996. On the same morning, the yield on the 30-year government bond reached 4.185%, while the yield on the 10-year government bond was reported at 2.945%.

For a country that has long relied on negative interest rates to combat deflation, this marks a significant shift.

Meanwhile, Bitcoin surged 22% in the past week, surpassing $80,000 for the first time since May. The core contradiction explored in this article is that while the Japanese bond market is experiencing severe turbulence, the crypto market is showing relative resilience.

The Underlying Logic of Carry Trades

In recent years, yen carry trades have been a significant force driving the global risk asset market. Investors borrow cheap yen, convert it to dollars, and then purchase various higher-yielding assets.

According to data from the Bank for International Settlements, offshore non-bank institutions have obtained approximately $250 billion in yen loans; using a broader measure, this figure could reach $500 billion. Such a massive leverage is built on a core premise: that Japanese interest rates will remain near zero for a long time. However, the current reality has overturned this old assumption.

In June, the Bank of Japan raised the policy interest rate to 1.0%, a new 31-year high.

The market widely expects that at the monetary policy meeting on September 17-18, the central bank will raise interest rates again. The unique monetary environment that Japan has maintained for the past thirty years is collapsing, and the yield of 2.88% on the 10-year government bond is far from just a cold number. Once the yen appreciates rapidly, carry trade positions can quickly turn from profit to loss.

Goldman Sachs' Praneet Shah stated, "As soon as the exchange rate moves, the annualized returns of all positions can be completely swallowed."

This scenario played out in August 2024: influenced by the yen's appreciation, Bitcoin fell from about $64,600 to $49,000 on August 5. The Tokyo Stock Price Index (TOPIX) also plummeted 12% in a single trading day.

But the situation is different now.

This month, the yen has given back more than half of the gains from the exchange rate intervention and is currently in a weakening state, trading at about 159 to the dollar. A weaker yen will again enhance the attractiveness of carry trades, so the Bank of Japan's future policy direction regarding the yen deserves close attention.

The Debt Cliff

At the end of June, Japan's national debt reached a historic high of 1,346 trillion yen (approximately $9.1 trillion). The Japanese government expects the debt level to rise to 1,492 trillion yen by the end of this fiscal year. Prime Minister Fumio Kishida announced that starting from April 2027, the consumption tax will be reduced to 1% for two years, which will create an additional fiscal gap of 5 trillion yen.

This creates a tricky dilemma: Japan needs higher interest rates to stabilize the yen and curb inflation; however, raising rates will significantly increase the burden of interest payments on its massive national debt.

The Bank of Japan announced that starting from April 2027, it will slow down the pace of debt reduction, indicating that the policy prioritizes market stability over a rapid normalization of monetary policy. Even so, the bond market has already shown clear signs of a lack of confidence.

Japan has sold some U.S. Treasury bonds to fund the exchange rate intervention in August. In June, holdings of U.S. Treasuries decreased by $26.4 billion, bringing total holdings down to $11.17 trillion. This was the largest single-month reduction among countries worldwide, directly pushing the yield on the 10-year U.S. Treasury bond up to 4.74%.

Debt pressure is not unique to Japan; it is part of a global trend of debt adjustment, with one of the sources of contradiction being the United States.

The Illusion of Bitcoin Decoupling

In the face of such macro turbulence, Bitcoin has remained almost unaffected, stabilizing above $78,700. This resilience challenges the traditional logic of "risk appetite." The key question is: is this a true market decoupling, or just a temporary illusion before the storm?

The logic of a pessimistic scenario is clear: if the Bank of Japan significantly raises interest rates and the yen strengthens, concentrated unwinding of carry trades could trigger a deleveraging of global risk assets.

During the sell-off in August 2024, Bitcoin was highly correlated with Japanese stocks, proving that Bitcoin cannot remain aloof. Additionally, as Japanese yields rise and interest-bearing asset returns increase, the attractiveness of Bitcoin, which does not generate interest, will decline in comparison.

An optimistic scenario presents another possibility. If the yen continues to depreciate, Bitcoin could become an attractive safe-haven choice for Japanese investors.

This is not purely theoretical speculation. Ray Dalio believes that Japan's debt situation supports the allocation value of Bitcoin, and he suggests a small allocation to Bitcoin while allocating 10-15% of assets to gold.

The participation of Japanese institutions is also on the rise. For example, Nomura's crypto subsidiary Laser Digital has obtained the first new license for a crypto trading platform in Japan in four years. Nomura's research shows that 79% of respondents plan to invest in Bitcoin within the next three years.

Japan's revised Financial Instruments and Exchange Act has reclassified cryptocurrencies as financial products, which is expected to promote the launch of spot crypto ETFs by 2027, along with independent tax rules. Japan's trading platform group may launch a crypto spot ETF as early as 2027.

As the regulatory framework becomes clearer, macro-level pressures continue to accumulate.

The Policy Turning Point in September

The next monetary policy meeting of the Bank of Japan is scheduled for September 17-18. Most institutions predict that the interest rate will be raised to 1.25%.

The bond market will fully price in expectations, but Bitcoin may not be able to fully absorb this. What is truly concerning is not the act of raising interest rates itself, but the central bank's statements regarding future policy constraints.

If the Bank of Japan signals that 1% is merely a transitional phase toward a 2% interest rate, the yen will strengthen rapidly, and carry trades will face large-scale unwinding. Conversely, if the statements reflect concerns about debt sustainability that limit the space for rate hikes, the yen will weaken further, and Bitcoin is likely to benefit from a weaker dollar and continued domestic buying in Japan.

The yield levels of 1996 should be regarded as a risk warning signal, rather than a market-driving factor. What truly dominates the market is the direction of the yen, not a specific exchange rate number. Currently, the yen is depreciating, and Bitcoin is rising. If the Bank of Japan's meeting in September alters mainstream market expectations, this correlation could suddenly reverse.

The current mainstream market pricing is that Japan's debt issue will evolve slowly and will not experience a sudden collapse. Bitcoin investors are not waiting for a reversal of carry trades but are already trading based on expectations of a weaker yen and continued inflow of institutional funds.

This logic has the potential to hold, but it still needs to be viewed cautiously in conjunction with the historical patterns of Japanese interest rates. For the first time in thirty years, the yield on the 30-year government bond is approaching 4%, which will inevitably have far-reaching market impacts.