Japan’s fiscal expansion creates market uncertainty
Japan’s government made a significant move on February 20, submitting three major fiscal bills to parliament. These bills formalize a structure of simultaneous tax cuts, record spending, and debt-financed deficits under Prime Minister Sanae Takaichi. The package carries both immediate risks and longer-term implications for cryptocurrency markets, particularly Bitcoin.
The 2026 budget totals ¥122.3 trillion ($793 billion) in spending—a record for the second straight year. Against projected tax revenue of ¥83.7 trillion, the government plans to issue ¥29.6 trillion in new bonds to fill the gap. Meanwhile, a separate tax reform bill raises the income tax threshold and extends mortgage tax breaks, reducing annual tax revenue by about ¥700 billion.
A third bill extends Japan’s special deficit bond law for five years from 2026. This is important because Japan’s fiscal law technically prohibits deficit bonds, allowing only construction bonds. But this exception has been renewed for decades, and the extension ensures the borrowing structure remains legally intact.
Bank of Japan faces pressure to raise rates
For crypto traders, the immediate concern is clear. This fiscal expansion increases pressure on the Bank of Japan to raise interest rates. Former BOJ board member Seiji Adachi said on February 16 that the central bank will likely have enough data to justify a rate hike in April. Mizuho’s global markets co-head went further, suggesting the BOJ could hike up to three times in 2026, potentially starting in March.
Markets currently price an approximately 80% probability of a hike by April. The pattern linking BOJ hikes to Bitcoin selloffs is well-documented. Bitcoin dropped roughly 23% after the March 2024 hike, fell 26% after July 2024, and declined 31% after January 2025.
The mechanism runs through the yen carry trade. When rates rise and the yen strengthens, leveraged positions funded in cheap yen unwind rapidly. Crypto tends to absorb the shock first due to its 24/7 trading and high leverage characteristics.
Current market conditions and longer-term implications
Bitcoin currently trades around $67,000, down over 47% from its October 2025 all-time high of $126,198. US Bitcoin ETF holders sit on average 20% unrealized losses with a cost basis near $84,000. ETFs have turned net sellers in 2026. Another BOJ hike could amplify this pressure.
However, the December 2025 hike to 0.75% had a limited impact, as markets had already priced it in. Speculative positioning is currently net long yen, suggesting a repeat of August 2024’s violent unwind is not guaranteed.
Beyond the immediate rate risk, the fiscal package reinforces a structural narrative that has been building around Bitcoin. Japan—the world’s most indebted developed economy—is cutting taxes and expanding spending simultaneously, funding both entirely with bonds.
Tokyo-listed Metaplanet embodies this thesis. Holding over 35,000 Bitcoin (roughly $3 billion) and targeting 100,000 Bitcoin in 2026, the company borrows in weakening yen through preferred equity instruments to accumulate Bitcoin. Its strategy is effectively an arbitrage on Japan’s fiscal trajectory: borrow in a depreciating currency, buy a fixed-supply asset.
For Bitcoin, Japan’s fiscal expansion creates a paradox. In the short term, it pressures the BOJ to tighten, threatening carry-trade-driven selloffs. In the longer term, the same fiscal trajectory erodes confidence in sovereign debt sustainability, strengthening Bitcoin’s positioning as a hedge against currency debasement.
Key variables to watch include the spring wage negotiation results in March, the BOJ’s April policy decision, and whether 10-year Japanese government bond yields—currently at 2.14% after retreating from January highs—resume their climb toward 3%. The situation presents both risks and opportunities for cryptocurrency traders navigating these complex macroeconomic currents.
