Japan's Economic Recovery Crushes Yen, Threatens Cryptos

Japan's economy has finally broken free from its 30-year slump after the country's 1990 bubble burst. The Bank of Japan (BOJ) kept interest rates near zero from 1999, making the yen the cheapest money on Earth. Investors borrowed it for almost nothing and bought assets that paid more, such as US bonds and tech stocks.

The 'yen carry trade' was a major contributor to global growth during this period, including the rise of cryptocurrencies like Bitcoin (BTC). However, Japan's recovery is now closing the tap, bringing inflation and crushing the yen. The currency hit a 40-year low near 164 per dollar in July, with the US and Japan spending $88 billion propping it up.

Markets are expecting another hike by October, Japan's third in 12 months, which could further sting at home as rates sit at their highest since 1995. Japan's biggest insurers are nursing $96 billion in bond losses. The last time the BOJ hiked rates was a surprise move in July 2024 that blew up the carry trade, causing Bitcoin (BTC) to fall about 25% in one week.

Not everyone expects pain, though. BitMEX co-founder Arthur Hayes argues that a Fed-backed yen defense could add liquidity and pump Bitcoin instead. Japan's economy has waited 30 years for this recovery, but it may come at the cost of its cryptocurrencies.