Under Japan's heavy debt burden, government bond yields hit a 26-year high, triggering a global asset sell-off

Japan’s debt issues once again become a black swan in the global financial markets. Recently, Bitcoin (BTC) prices fell below $89.88K, and Ethereum (ETH) also retreated to $3.03K. This is not a mere market fluctuation but a chain reaction of Japan’s debt crisis impacting global assets. As a liquidity barometer for traditional finance and cryptocurrencies, Bitcoin’s decline often signals broader market risks brewing.

Heavy Japanese debt burden, soaring yields as the fuse

Japan’s 20-year government bond yield recently surged to 2.745%, hitting a 26-year high, reflecting investors’ concerns about the sustainability of Japan’s debt. Japan’s government debt-to-GDP ratio is as high as 263%, totaling over $10.2 trillion, making it an outlier among major global economies.

Japan has long endured such massive debt largely thanks to years of zero interest rate policies—maintaining an ultra-loose monetary environment that allows rolling over old debt through new government bond issuance. However, as bond yields rise, this balance is being disrupted. Overseas capital is flowing back into Japan due to rising interest rates, boosting inflation expectations, which will force the Japanese government to reconsider tightening policies, thereby threatening liquidity conditions across the global financial system.

Arbitrage reverse attack, crypto markets as the first victims

To understand the decline in crypto markets, one must first recognize the importance of the “yen arbitrage trade” as a key support for global liquidity. Over the years, international investors have borrowed heavily in low-interest yen to purchase dollar assets—including US stocks, US Treasuries, tech stocks, and cryptocurrencies. This arbitrage model supported the prosperity of global assets and benefited cryptocurrencies like Bitcoin and Ethereum from continuous capital inflows.

In 2024, when the Japanese government announced rate hikes, this arbitrage pattern was forced to end. Large investors had to sell dollar assets to repay yen loans, causing Bitcoin to plummet from $90,000 directly to $78,000, with other markets experiencing synchronized sharp declines. Now, with Japanese government bond yields reaching new highs, the same risk re-emerges—any forced rate hikes due to debt pressures and stimulus measures will again constrain global arbitrage trading.

Rising inflation forcing rate hikes, liquidity depletion will severely impact global assets

The current situation is heading toward the worst-case scenario. The Japanese government faces a dilemma: not implementing economic stimulus could lead to stagnation, but launching new stimulus plans would further increase debt ratios, intensifying investor concerns. Either path will push up government bond yields and, through inflows of overseas capital, exacerbate inflation.

Once inflationary pressures force Japan to raise interest rates, the global financial system will face liquidity shortages. Trillions of dollars of arbitrage capital will need to exit dollar assets, which will not only severely impact Bitcoin and the crypto markets but also cause synchronized adjustments in US stocks and bond markets. Japan’s debt problem is no longer a regional risk but a systemic threat to global asset allocation.

Crypto investors should closely monitor Japan’s policy developments and government bond yield trends—when this indicator rises again, it may signal another round of tightening global liquidity, and the ripple effects of Japan’s debt crisis will far exceed market expectations.