Bitcoin Drops 15% Against Japanese Yen, Outpacing Declines Versus USD, as Yen Carry Trades Unwind

As a seasoned crypto investor with over a decade of experience navigating global financial markets, I’ve learned to keep a keen eye on regional economic trends that can significantly impact digital asset prices. The recent events unfolding in Japan serve as a stark reminder of this lesson.

In Tokyo’s bitFlyer exchange, Bitcoin’s yen-based value dropped by almost 15%, experiencing larger decreases compared to its dollar-based counterpart that fell by 11% on Western exchanges.

On bitFlyer, trading activity significantly increased by 241% within a 24-hour period, reaching over $220 million as per data from Coingecko.

The significant decrease in yen value was primarily due to the Japanese currency’s rapid strengthening in the international currency market. Last week, Japan increased its interest rates by 0.25%, causing the yen to grow stronger, which in turn resulted in a decline across risky assets such as bitcoin.

The downturn continued on Monday as markets in Asia closed with losses for the day. Japan’s Topix 100 index experienced its poorest performance since 2011, and the Nikkei 225 fell by 12.4%. Traders of cryptocurrency futures faced their most challenging day since March, as over a billion dollars worth of liquidations in crypto-linked futures were recorded within the past 24 hours.

In just three weeks, the value of the Japanese yen has climbed close to 10%, marking a significant surge for the third largest global reserve currency and the currency most favored globally by traders for financing acquisitions of high-risk financial assets.

Last week, the Bank of Japan increased its rates, making the Japanese yen more attractive and causing a shift in carry trades. Some analysts believe this move may have initiated a decline in high-risk investments. Carry trade refers to a financial strategy where an investor borrows a currency or asset with a lower interest rate, like the yen, and uses it to buy another asset offering a higher return.

“Augustine Fan, head of insights at SOFA.org, explained to CoinDesk via Telegram that the unraveling of the carry trade is primarily a result of large-scale macro trades being liquidated. This is evident from significant shifts across various asset classes, and hedge funds are compelled to sell off their positions for profit protection.”

“Fan stated that Japan’s profits from long positions in USD/JPY and the Nikkei have been substantial. As these primary income streams are being unwound, it seems we can expect a modest or subdued outlook on market risk and investors’ appetite for risk in the near future.”

While some maintain an optimistic outlook, they propose that the market might be nearing a temporary low point over the next few days.

As a researcher at Metalpha, I recently observed that the market pullback was likely due to Japan’s economic policies tightening. Specifically, the central bank unexpectedly raised interest rates as part of a shift towards a more hawkish stance. Meanwhile, concerning macroeconomic data in the U.S. has made investors anxious about the potential for a recession.

Although the Federal Reserve hasn’t officially announced a rate cut for September, the market seems to have factored in this possibility. Therefore, as the overall economic climate becomes more favorable, we might observe an uptick in Bitcoin prices, according to Hu’s statement.