Economist Fred Krueger assessed global concerns over Japan’s rising interest rates and its potential impact on Bitcoin (BTC).
Krueger said social media comments linking the rise in Japan’s 10-year government bond (JGB) interest rate from 1% to 2% to scenarios such as “world collapse” or “Bitcoin is next” are false, pointing out that Japan’s economic structure is fundamentally different from that of the United States.
Krueger said Japan is a “unique” economy that has lived with near-zero interest rates and quantitative easing (QE) policies for more than 20 years, resulting in an almost completely flat yield curve. In this environment, life insurance companies, especially Nippon Life, one of Japan’s most conservative financial institutions, faced serious yield problems. These non-speculative institutions required annual returns of approximately 2-3% to meet their long-term pension and insurance obligations. However, with interest rates on government bonds near zero, it was impossible to achieve this return domestically.
Therefore, Japanese insurance companies rationally turned to U.S. Treasuries and mortgage products. The majority of currency risk was hedged in yen. Until 2022, this strategy worked relatively smoothly. Interest rates in both the United States and Japan were low, limiting the cost of hedging currency risk. The fact that interest rates in the United States were higher than in Japan also appeared to solve the underlying yield problem for insurance companies.
But this balance was disrupted when Federal Reserve President Jerome Powell raised interest rates above 5%. Currency hedging costs rose rapidly, and the yield on U.S. Treasuries in yen terms fell to almost zero. Krueger pointed out that Japanese financial institutions did not panic at this point and did not sell U.S. Treasuries, but simply stopped new purchases.
Another irony highlighted by Mr. Kruger was the long-term depreciation of the yen. Over the past decade, the yen has fallen from about 80 yen against the dollar to 160 yen in 2024. It could have been much more profitable to hold the position unhedged during this period. However, Japanese insurance companies continued their hedging strategies as risk-averse financial institutions that prioritized balance sheet protection. Conversely, the weaker yen has significantly increased the margins and profitability of Japanese exporters like Toyota in recent years.
According to Krueger, the main factors that forced Japan to raise interest rates were inflation and rising wages, rather than the debt market or a “bond trigger.” After decades of deflation, the zero interest rate policy became harmful to savers and insurance companies as inflation rose consistently above 2% and wages began to rise. At this point, the Bank of Japan (BOJ) had no reason not to raise interest rates even if it didn’t want to.
Krueger said that at this stage Japan is in a limited normalization process similar to the US in 2018, and argued that while short-term interest rates could rise to the 1-2% range over time, full interest rate normalization as seen in Western economies is not possible. In the longer term, short-term interest rates in Japan and the U.S. may converge again, but Krueger suggested that the positive divergence in long-term rates could remain and carry trades could resume, albeit slowly but without dramatic changes.
Regarding Bitcoin, Krueger said he does not expect these developments to have a sudden and dramatic impact. According to him, what is happening now is not a crisis like 2008 or a hidden system collapse. It is a slow process of normalization after decades of instability. Indeed, in the long run, it is not entirely impossible to rule out that even ultra-conservative Japanese life insurance companies, which have struggled to achieve real returns for years, may start considering Bitcoin not as a speculative tool, but as a small, uncorrelated asset in their portfolio.
*This is not investment advice.
