Japan is defending the yen against the turmoil of current economic conditions. (Image: iStock) The Japanese government has stepped into the market to defend its currency — not for the first time. The country sold off almost $100-billion across three spending periods in 2024. The last intervention in August of that year wiped $600-billion off the crypto markets.
This week against the yen, the dollar rose to 161, briefly, before settling at 157 after sharp losses since Thursday, when sources told Reuters authorities had stepped into the currency market to arrest a steep selloff in the Japanese currency.
This time is different. This time the Japanese interest rate is still at the 0.75% that broke the arbitrage opportunity, and the bitcoin market is not blinking.
The craziest thing that you would think other crypto community members know about, but often don’t, is all the arbitrage tricks that happen to prop up the bitcoin price.
My favourite one to explore goes like this: What if your local bank offered you a massive loan with absolutely zero% interest? You’d probably take it, buy some crypto, and pocket the trade difference.
The ruin of many
This happens every minute in the world of global finance. This is arbitrage (making a profit off a pricing gap), and until about the end of last year — when Japanese interest rates rose from zero to the highest they had been since Madiba walked free — it happened mostly in the land of the rising sun.
That deal was known as the Japanese yen carry trade, because for years Japan’s interest rates were parked near zero. So big global hedge funds did exactly what you’d do: they borrowed yen for practically nothing, converted it into dollars, and bought high-reward assets like bitcoin.
This strategy has acted as an invisible windmill, pumping billions in “cheap” money into the crypto market and fuelling some of bitcoin’s biggest bull runs.
And now the trading treadmill is coming to a stop.
The Bank of Japan is considering raising interest rates further to protect its struggling currency. Suddenly, borrowing yen is no longer free. When rates go up or the currency suddenly gets stronger, these massive investors get a nasty wake-up call and the algorithmic bots that do their bidding start paying back the loans.
One foot on the platform
How do they get the cash to pay back these loans? They hit the panic button and sell off their most easily tradable assets.
Bitcoin is almost always the first thing they dump — gold is the other — to cover their debts, which is exactly what triggered that brutal crypto washout of 2024.
The weird thing is that Japan’s rising yields and currency volatility actually reflect an economic normalisation. The country is by no means on the verge of fiscal collapse. But the transition from a monetary- and fiscal-policy-dependent economy to a free-market economy could significantly affect a major source of global market liquidity.
Policy decisions that cause sharp, sudden changes in rates and/or the yen can have a notable effect on stock and bond markets worldwide.
So, the next time you're wondering why bitcoin is suddenly dropping out of nowhere, don’t just look at what’s happening on Wall Street. Keep an eye on Tokyo. DM