Economist Fred Krueger assessed the global concerns surrounding rising interest rates in Japan and their potential impact on Bitcoin (BTC).
Krueger argued that comments on social media linking the rise in Japan’s 10-year government bond (JGB) interest rates from 1% to 2% to scenarios such as “global collapse” and “Bitcoin is next” were incorrect, pointing out that Japan’s economic structure is fundamentally different from that of the United States.
According to Krueger, Japan is a “unique” economy that has lived with near-zero interest rates and quantitative easing (QE) policies for over two decades, resulting in an almost completely flattened yield curve. In this environment, life insurance companies, particularly Nippon Life, which are among Japan’s most conservative financial institutions, faced a serious yield problem. These non-speculative institutions needed an annual return of approximately 2–3 percent to meet their long-term pension and insurance obligations. However, since JGB interest rates were near zero, it was impossible for them to achieve this return domestically.
Therefore, Japanese insurance companies rationally turned to US Treasury bonds and mortgage products. A large portion of their currency risk was hedged in yen. Until 2022, this strategy worked relatively smoothly; interest rates were low in both the US and Japan, and the cost of hedging currency risk was limited. The fact that US interest rates were higher than in Japan also seemed to solve the insurers’ fundamental yield problem.
However, this balance was disrupted when FED President Jerome Powell raised interest rates above 5 percent. Currency hedging costs increased rapidly, and yields on US Treasury bonds were almost completely wiped out when calculated in yen. Krueger noted that at this point, Japanese institutions did not panic, did not sell their US Treasury bonds, and simply halted new purchases.
Another ironic point Krueger highlighted was the long-term depreciation of the yen. Over the past decade, the yen has fallen from around 80 against the dollar to 160 in 2024. Holding positions without hedging could have been far more profitable during this period. However, Japanese insurance companies, being risk-averse institutions that prioritize protecting their balance sheets, continued with their hedging strategies. Conversely, the weakening of the yen has significantly increased margins and profitability for Japanese exporters like Toyota over the years.
According to Krueger, the main factor forcing Japan to raise interest rates was not debt markets or “bond triggers,” but inflation and wage increases. After decades of deflation, with inflation permanently rising above 2 percent and wages beginning to increase, the zero-interest rate policy became detrimental to savers and insurance companies. At this point, the Bank of Japan (BOJ) had no reason not to raise interest rates, even if it didn’t want to.
Krueger stated that, at this stage, Japan has entered a limited normalization process similar to the US in 2018. He argued that short-term interest rates could rise to the 1-2 percent range over time, but a full interest rate normalization in the sense seen in Western economies is not possible. In the long term, while the US and Japan may converge again in short-term interest rates, Krueger suggested that a positive divergence in long-term interest rates could be maintained, allowing carry trades to resume, albeit slowly and without dramatic changes.
Regarding Bitcoin, Krueger said he doesn’t expect these developments to have a sudden and drastic impact. According to him, what’s happening isn’t a 2008-like crisis or a hidden systemic breakdown; it’s a slow normalization process following decades of instability. In fact, in the long term, it’s not entirely impossible to rule out the possibility that even ultra-conservative Japanese life insurance companies, which have struggled to achieve real returns for years, might start considering Bitcoin not as a speculative tool, but as a small, low-correlation asset in their portfolios.
*This is not investment advice.
