As of the time of writing, Bitcoin's price is attempting to maintain its position around $94,000, just above its lowest levels not seen for months. Despite the weekly closure occurring at a somewhat reasonable range, developments in Japan are negatively impacting cryptocurrencies. Numerous issues are pressing on crypto, and now Japan has emerged as an additional challenge.
Japan and the Global Financial Landscape
Japan’s 10-year bond yield has reached its highest point since the 2008 era. For about 30 years, Japan has been printing money at a 0% interest rate and exporting it globally. Over $3.4 trillion of U.S. Treasury Bonds have been channelled into European and other markets. Stocks have grown, and countries have maintained their debt servicing capacity; however, this was bound to reach an end.
As of November 10, the bidding has ceased. Japan’s yield has surged to 1.71%. Japan’s debts now stand at 263% of its GDP, yet it continues to inject $110 billion into its economy. Annually, Japan pays $27 billion more in interest, marking significant changes in the economic landscape.
Who will be affected? All of us. Japanese pension funds have already started to retract $1.1 trillion from U.S. Treasury bonds. Formerly the largest buyer of U.S. bonds, Japan has now turned into a seller.
Impact on Cryptocurrencies
As Shanaka Anslem Perera notes, “When Japan stops purchasing, interest rates don’t remain static. They explode. The U.S. 10-year bond rates will escalate by at least 40 basis points purely due to flow dynamics. Your mortgage rate at 7% will jump to 8%. Corporate debt refinancing costs will rise by 60%. Companies holding $3 trillion in junk bonds will begin defaulting in waves.”
“Yen carry trade has reversed. A $1.2 trillion yen-funded debt needs retracting for cryptocurrencies, stocks, and emerging markets. Every hedge fund, every momentum trade, and every leveraged investment relying on Japan’s free money will face margin calls simultaneously.” – Shanaka Anslem Perera
Finance is preparing for a new era, and people are mitigating risks. The absence or retreat of capital inflow from Japan is dire for both the stock and bond markets, leading to potential debt crises in some nations. The Bank of Japan meets on December 18, with a 50% chance of raising rates and shaking markets further. Coincidently, such declines in the carry trade aren’t a novel sight in the past year, but this time it feels more painful due to Japan’s 10-year bonds hitting records not seen in years.
Shanaka Anslem Perera describes this as “The world’s largest piggy bank breaking and money flowing back.” It remains uncertain what the Fed will do, or whether it can do anything. Uncertainty, truly the keyword, is despised by risk markets. By December 18, this uncertainty is likely to present negative outcomes for cryptocurrencies, a scenario that has already started to manifest and is exacerbated by Supreme Court ruling uncertainties and other potential risks.