Japan Raises Interest Rates: Why It's Not a "Global Disaster" and BTC Isn't the Next Victim?

Economist Fred Krueger recently provided a notable analysis to counter the pessimistic views circulating on social media regarding Japan’s increase in the 10-year government bond yield (JGB) from 1% to 2%. According to him, linking this event to scenarios such as “global collapse” or “Bitcoin being the next victim” is a misunderstanding of the core issue, because Japan’s economy has a completely different structure compared to the US and Western economies. Japan’s “Unique” Economy Krueger states that Japan is an “unparalleled” economy. Over the past 20 years, the country has lived with near-zero interest rates and prolonged quantitative easing (QE) policies, which have almost completely flattened the yield curve. As a result, life insurance companies—such as Nippon Life, Japan’s most conservative financial institutions—face a yield dilemma. To meet long-term obligations like pensions and insurance, they need a stable return of about 2–3% annually. However, with domestic bond yields close to zero, achieving this goal is nearly impossible if they only invest domestically. Why Is Japan Investing in US Bonds? In light of this, Japanese insurance companies have chosen a rational path: investing in US Treasury bonds and mortgage-backed securities, while hedging currency risk with the yen. Before 2022, this strategy worked relatively smoothly: US and Japanese interest rates were both low, currency hedging costs were not too high, and the interest rate differential helped solve the yield problem. However, this balance was disrupted when FED Chair Jerome Powell raised interest rates above 5%. Currency hedging costs surged, making the yields on US bonds when converted to yen almost “disappear.” Nonetheless, Krueger emphasizes that Japanese financial institutions are not panicking or dumping US bonds; they are simply halting new purchases. Yen Depreciation: Paradox and Export Advantage A “paradoxical” point Krueger highlights is the prolonged weakening of the yen. Over a decade, the yen/USD exchange rate has fallen from around 80 to nearly 160 in 2024. Without currency hedging, foreign investment returns could be even higher. However, with a risk-averse balance sheet philosophy, Japanese insurance companies continue to hedge. Conversely, a weak yen has become a significant advantage for export giants like Toyota, helping improve profit margins and international competitiveness over many years. The Real Reason BOJ Must Raise Interest Rates Krueger believes the main driver behind the Bank of Japan (BOJ) raising interest rates is not “bond activation” or public debt pressure, but inflation and wages. After decades of deflation, Japan’s inflation has stabilized above 2%, and wages are beginning to rise again. In this context, the 0% interest rate policy no longer benefits savers and insurance organizations. The BOJ therefore has no rational reason to maintain ultra-low rates, even if they are not eager to make drastic changes. Gradual and Controlled Normalization According to Krueger, Japan is entering a phase of limited normalization, similar to the US in 2018. Short-term interest rates may gradually rise to around 1–2%, but a full normalization process like in the West is unlikely. In the long term, short-term rates in the US and Japan may converge again, while long-term rates remain moderately spread. This allows carry trade transactions to return, but in a slow, stable manner that does not cause major disruptions to the global markets. Will Bitcoin Be Affected? Regarding Bitcoin, Krueger suggests that current developments are unlikely to cause major shocks or sudden impacts. This is not a crisis like 2008 or an underground system collapse, but a slow adjustment process after decades of abnormality. Moreover, from a long-term perspective, Krueger does not rule out the possibility that Japan’s highly conservative life insurance companies—struggling to find real yields for years—might consider Bitcoin as a small, low-correlation asset in their portfolios, rather than viewing it solely as a speculative tool. Conclusion According to Fred Krueger, Japan’s interest rate hike is not a signal of a “global crash,” nor does it directly threaten Bitcoin. It is simply a necessary step in the gradual and controlled normalization of the economy. For the crypto market, especially Bitcoin, the impact—if any—will be long-term and structural, rather than short-term shocks as many fear.