Japan's role as a critical component of the global market narrative surrounding Bitcoin continues to grow, due in part to the role the Japanese yen played as one of the world's major ultra-low-cost funding currencies.
This relationship is now changing. The Bank of Japan has raised its policy rate to 1.25% in September 2026, reaching its highest level since roughly 30 years ago.
Japanese bond yields have climbed sharply and policymakers are beginning to discuss whether interest rates may need to accelerate.
For Bitcoin, the key question is the implications for any investor unwinding their positions which were financed with cheap yen.
An orderly or disorderly deleveraging trade could lower the amount of liquidity in the global markets and create further pressure on risk assets, including cryptocurrencies, but it is not guaranteed that we will see a repeat event of the same size as the carry trade disruption of 2024.
Why the Yen Carry Trade Matters
The yen carry trade is relatively simple in theory. For years Japanese interest rates have been notably lower compared to several major economies which allows for investors borrow yen at low cost and place this capital into risk assets which have a larger potential for returns.
These assets could include government bonds, equities, currencies and other risk-sensitive investments.
The calculation becomes more complex if rates in Japan rise or the yen appreciates rapidly.
In such a case, carrying trades would become less economic and a stronger yen could create a secondary issue for those that borrowed the currency as these individuals and entities may need more of the investment currency to pay off their liabilities.
This encourages certain traders to close the trades at the same time, and The Bank of International Settlements noted that yen financing and other funding of this type had expanded significantly prior to the market disruption of August 2024, and they note that crypto assets were one of the affected markets during this deleveraging episode.
This serves as a reason why Bitcoin traders continue to remain especially attentive to Japanese monetary policy.
Japan Is Moving Away From Ultra-Cheap Money
The latest developments suggest that Japan's monetary ecosystem is structurally different to the one we were exposed to over the past few decades.
The BOJ has increased their policy rate to 1.25% in September and 10 year Bond yields have consequently moved above 3%, hitting levels unseen since the 1990s.
This change is significant because higher domestic-yields could alter the dynamics surrounding Japanese investors.
Rather than pursuing offshore capital, these players could find Japanese assets to be more attractive. Reuters has reported that some market participants have started to consider opportunities for a so-called reverse carry trade, following the yield hikes and as the traditional yen strategies begin to lose their appeal.
This is not necessarily indicative that the money will exit from Bitcoin, but it does suggest the overall global liquidity environment could be more difficult for highly leveraged positions.
The BOJ Could Put Markets on Edge
The next step for Japan's monetary policy may be as important as the increase which has already taken place.
A summary of the BOJ's meeting in September suggests several policymakers believed it could be necessary to raise Rates further and the pace of tightening could accelerate if inflation runs through expectations.
This causes some uncertainty for the market.
If investors believe that Japanese rates will continue to rise gradually; they have more time to deleverage their positions. On the other hand, a rapid policy change could spark a faster reaction.
Currency markets would be the first point of reaction, and a rapid appreciation in the yen could cause existing yen funded positions to cost more to maintain or close, and traders would potentially sell other assets in order to raise cash and reduce their level of leverage, and this could happen particularly quickly.
Bitcoin's global and highly liquid market make it highly sensitive to any such broad deleveraging trade.
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| Could japan's changing rate policy spur another bitcoin carry trade shock? |
Why 2024 Still Matters
The strongest reason that traders watch Japan is the experience of August 2024.
At that time, a change in policy expectations caused a significant unwind of the yen funded positions, as did the subsequent deleveraging trade across the global markets.
Crypto is not isolated from this, and the BIS noted that Bitcoin and Ethereum recorded losses of up to 20% during the episode as leverage was reduced and the margins forced more pressure.
This caused a lasting imprint on the minds of crypto traders, and whenever the yen starts to rise sharply or the BOJ becomes more hawkish, a number of investors will ask themselves if the mechanism could repeat and the necessary conditions.
However, repeating the 2024 experience requires a number of events to take place and several are not guaranteed.
Japanese rates would have to rise enough to alter funding incentives, the yen would need to move appreciably, leverage would have to be high and global investors would need to reduce leveraged positions at the same time, which cannot be assumed.
Bitcoin Has Already Shown a Different Reaction
One significant detail is that Bitcoin did not collapse following the BOJ's rate increase in September.
Instead, Bitcoin moved above $77,000 shortly after the central bank had raised rates by 25 Basis Points to 1.25%. The yen weakened following the decision and did not strengthen rapidly.
This is an important detail as a classic carry trade unwind is generally more disruptive for investors when the funding currency strengthens sharply.
If the yen remains weak, investors using the currency to borrow money do not face the same level of currency pressure when closing their positions.
This means that the September BOJ decision does not represent the automatic repeat of August 2024, and this highlights why the relationship between Japan and Bitcoin should not be summarized in the rule that higher Japanese rates mean lower Bitcoin prices.
Japanese Bonds Could Become Another FactorInterest rates are only one aspect of the story.
The Japanese bond market is also beginning to encourage a changing attitude amongst investors.
The rise in Japanese government bond yields could encourage domestic institutions to hold more capital at home rather than buying foreign assets, but this may not be immediately discernible for crypto investors. Significant changes in institutional capital allocation can influence the global liquidity environment over time, and particularly because these players have been historically major participants in international bond markets.
If higher domestic yields make Japanese assets competitive, then a certain amount of capital could be gradually returned home.
This would not necessarily spark a Bitcoin sell-off in-and-of-themselves, but it could become part of a broader move where the overall tightening of global financial conditions occurs.
What Bitcoin Traders Are Watching Out For Right Now
There are several indicators that could tell us if Japan is going to be a larger source of volatility for Bitcoin.
The first is the USD/JPY exchange rate. A rapid recovery in yen would deserve special attention as this could apply pressure on the existing carry positions.
The second is the communication from the BOJ. Investors will be watching whether the officials continue to signal a gradual normalization process or prepare the markets for faster increases.
The third is the level of Japanese government bond yields. A rapid rise could spark changes in the capital allocating practices of these markets.
The fourth point is the level of leverage in the global markets, and a heavily leveraged market tends to be vulnerable to a change in funding conditions.
Finally, the reaction of Bitcoin itself matters. If BTC remains relatively resilient to changes in Japanese rates, this means other liquidity factors are at play.
Could Japan Create Another Bitcoin Shock?
Japan has the ability to influence Bitcoin through the funding system in the world, but a disorderly unwind is not guaranteed.
The increase in rates in September serves as an important example and despite moving the BOJ to a 31 year high, Bitcoin initially rose and the yen weakened.
Simultaneously policymakers are continuing to discuss rate increases which means the risk is still present.
The biggest concern would be combination of faster BOJ tightening, a rapid appreciation of the yen and a broad reduction in leveraged risk which could apply pressure on multiple markets at the same time.
For Bitcoin, Japan is therefore more about the direction of the global liquidity environment than the specific actions of either the BOJ or individual interest rate changes.
As the era of ultra-low yen funding begins to change, crypto traders will remain attentive to the movements of the BOJ, the yen and Japanese bond yields as they begin to track the changes alongside the Federal Reserve and US liquidity conditions.
For now, the evidence suggests that a market is readjusting to the new Japanese monetary environment but not confirming the 2024 repeat of the carry trade shock. The next moves with regards to the yen and Japanese rates will determine if this remains true and if Bitcoin moves from being a volatile but contained market to a much larger source of volatility.