This is NOT Investment Advice

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Several times over the last few years I've mentioned Japan and its significance and referred to Japan as something worth watching, etc.  This post aims to add a lot of clarity to that suggestion of keeping an eye on Japan.

Let's look at Real Yields on the Japanese 10YR.  The data below on Japan's real interest rate environment comes from the ECB.  Yes, I am very skeptical of the motives and intentions of the ECB, but they are more than capable of getting staff to compile and report data.

Why real yields?  We are looking at the nominal level of rates minus inflation.  How much ground are you gaining if those safe bonds you bought yield less than the rate of inflation? 

As shown below, since the GFC in particular, Real Yields in Japan have been moving down and into negative territory or negative.  Enter the Yen Carry Trade.  The BOJ has been paying investors to borrow money in Yen.  In many cases that liquidity moves into higher risk assets like AI VC money speculation, the Mag 7, and yes Bitcoin. 

As emphasized by the green arrow, generally speaking the BOJ has been very, very kind to risk assets since the GFC.  Real Rates topped at about 350-400 BPS around when the Fed started to crank out QE and ease.  It's been a gravy train since AND the Fed has been in and out of QE virtually the entire time! 

Looking closer at the last few years - just as the Fed started hiking the BOJ moved into trying to give out as much free Yen as possible as quickly as possible.  Green arrow is BOJ dove helping Fed.  Blue circle is the Fed/BOJ dance trying to get Japan's real yields back into positive territory .

Now - we have a problem.  Inflation in Japan is actually rising from the ashes though recent readings show it cooling somewhat in terms of rate of growth.  The market expects 50 BPS or more of hikes from the BOJ, but over a two year period. Powell may be flip flopping between cutting and hiking as he watches the Near Term Forward Spread oscillate, but he also might be trying to give the BOJ a window to hike and get real rates into positive territory.  Powell could view easing more now as too bubbly and inflationary to reignite QE while the Japan gravy train is still flowing. 

The increase risk to BTC and "risk assets" if you will is in essence a stagflationary mehhh quagmire of constantly anticipating some sort of "next stimulus" that drags on.  If Powell can't cut now according to the textbooks, then maybe he needs . . . . . . . . . a market crash . . . . . . . to cause a "deflation scare" supported by textbooks as reason for response. 

If Powell doesn't cut relatively soon, the extra term risk of the Net Interest Expense exposure of the Treasury is much more likely to come back into focus.  But Bessent says they are a "long way off" from selling more 10Y/30Y.  Bessent's flush with TGA, so what's the rush for QE?  More at play here than just on the surface. 

As shown below, recently real yields have gone more negative (opposite of what the BOJ needs now), so does that mean Powell/BOJ will need even more time to get where they want to go (apparently). 

So what's the hedge and so what?  Shown below is the Yen getting absolutely torched right from where the Fed kicked off its hiking cycle.  Coincidence?  As you can see it is putting up a much tougher fight recently, with round two now underway after the BOJ folded a while back when trying to flip to hawk.  Are they really, really serious this time? 

Yields on the JGB 10YR.  Are we in an actual "new normal" here where Japanese society really does need the BOJ to Make Rates Real Again?  Rising rates have many other impacts as well.  Rates are up about 100 BPS in two years but coming from the depths of "free money" to a hawkish BOJ.  When Powell raised in 2021/2022 America started to see cracks and eventually some banks went bust from stuffing too many of the very bonds recommended by the Central Bank onto their balance sheets.  Who owns all the JGBs?  Japanese citizens but also banks, insurance, and pension funds. 

If you think about it with a clear and open mind . . . . . . . JGBs are insanely overpriced right now if in fact Japan now has a sustained level of inflation ongoing.  It would take 500+ BPS in yield on the 10YR to attract committed investors, but the process of getting the prices to that point would blow up the entire financial system potentially.  This also explains why the BOJ holds the bag.  Nobody else wants these! 

So it's all over now huh?  Not saying that.  Think of it as a source of nourishment for wildlife that is slipping away or even vanishing.  The getting was good and everyone was fat and happy for a while.  Now, as the water and easy target fish dry up, some wildlife might not make it and all will have to adjust. 

There are still many, many more tailwinds for Bitcoin than headwinds, but this recent risk off move is a strong reminder as to how much leverage and FOMO/MOMO is built into assets in general frankly.  The Yen Carry is a very big deal, but nobody can tell you exactly what percentage of NVDA's rise depends on it or the exact levels at which to short/long USDJPY or JGB.  I would look for levels but rate of change.  Very sharp Yen rallies and JGB selloffs are signals.  According to the ECB, BOJ needs a bump of more than 100 BPS to get a chance at firmly being in positive territory, and inflation was 4%+ a couple months back.  If that is the case the JGB needs to get to 550 BPS to entice investors not just traders in and out.  If inflation truly is say 3-5% and can sustain that, then why would I hold a JGB yielding 140 BPS?  You should be able to understand now why the BOJ already owns more than half the JGB market!

Does Bitcoin have to get cuts from Powell and QE?  No.

Bitcoin is in a very unique situation (similar to gold) where it is most often the first to get smacked around in a "risk off" move if you will, but given the conundrums in play it is also actually the solution.  It's a beach ball but one that can't be killed or completely drained of air.  Yeah lots of things can gang up and keep it underwater for a while . . . . . . and a while . . . . . . but it's still alive and ready to pop up above water. 

Feels like Powell/Bessent/BOJ are trying to thread the needle and buy more time.  How long will the market stick around to find out the ending? 

As stated, it's not as if there is nothing out there in the world of finance and economics that is helpful to BTC.  Enter the Chinese Bazooka:

You might say so what can't trust anything from China.  Look at where money has moved below in response to the first attempt at a Bazooka (an ultimate dud) and now this recent attempt (hint, wink, nod - it flows to risk on assets):

Positive:

- Global Liquidity rising and BTC lag effect to "catch up"

- China bazooka

- all the other things discussed here recently and going back

Negative:

- Bessent flush now TGA, can play the same Yellen games with short end/QEish

- Lummis says to not wait on the Feds and states will beat them (yeah but when)

- Risk Off Dilemna

- ETH/SOL/crap drag effect

- More than half of ETF $$$$ is MOMO/FOMO at institutional level (hint they WILL sell when they need to) and we already saw the recent retail buyers are very, very fickle and unreliable

- Stagflationary time decay and time capitulation

- Fed/BOJ dance to try and sneak in BOJ hikes, and how long will this take?

The market generally has a very strong tendency to cause the maximum amount of pain for the maximum number of participants.  At 109K very few thought a dip below the 200DMA was even plausible.  At 78Kish the whole world is going to end. 

If the Yen Carry really started melting down, imagine this one here would possibly move a lot, lot higher:

If long the above and the BOJ folded and flipped dove, your stop loss will get hit very fast. 

The Goldilocks Solution (brings a nightmare with it):

US econ data tanks, Fed says "gosh, we need to cut now, and the forwards are diving!"

Japan inflation data accelerates, BOJ says "alright now, this time we're gonna talk and act a lot tougher"

Fed ease, BOJ hawk.  Only problem is what happens when the Japanese bond market collapses on itself?