Bitcoin Under Pressure as Japanese Bond Yield Hits 17-Year High, Yen Depreciates

A lot can change in just a few days. Bitcoin recently reached new all-time highs of over in both U.S. dollar and Japanese yen terms, boosted by new Japanese prime minister, Takaichi Sanae's bias for ultra-easy Abenomics policy setting.

However, the very same Abenomics bias now seems to be working against BTC through its impact on the bond market.

One of the key features of Abenomics is the implementation of an expansionary fiscal policy, characterised by increased government spending to support economic growth. In other words, bond supply could increase, worsening the already dour fiscal outlook.

The Japanese government bonds seem to be pricing that, pushing yields higher. (bond prices and yields move in the opposite direction). According to TradingEconomics, the 10-year JGB yield hit a high of 1.70% early Wednesday, the highest since July 2008. It has risen by 13.31 basis points in one week and over 76 basis points in 12 months. The 30-year yield rose to 3.34% and quickly fell back to 3.16%.

Rising bond yields typically zap investor risk appetite as they increase the cost of borrowing, denting the appeal of riskier assets such as stocks and cryptocurrencies. Some analysts view bitcoin as both a risk asset and a digital form of gold, although historically data shows that the cryptocurrency tends to track tech stocks more closely.

The upswing in JGB yield is even more concerning, considering its impact on the global bonds. According to Goldman Sachs, volatility in Japanese bonds could spill over into Treasury notes, adding to market jitters.

For every 10 basis point "idiosyncratic JGB (Japanese government bond) shock,” investors can expect around two to three basis points of upward pressure on U.S., German and U.K. yields, strategists at Goldman Sachs said in a recent market note, according to Bloomberg.

Dollar strength

The dollar index has climbed to a two-month high and the move is likely being led by the depreciation in the Japanese yen, which has dropped 3.5% against the USD since Friday.

The JPY's decline is also linked to Abenomics, which calls for low interest rates at home. The probability of a Bank of Japan (BoJ) rate hike this month has dropped since Sanae talked about Abenomics on Saturday.

The dollar index comprises six major fiat currencies – EUR, JPY, GBP, CAD, SEK and CHF. The euro has the highest weight followed by the yen.

A rising DXY often causes financial tightening and caps upside in BTC, gold and other dollar-denominated assets.

While BTC's rally has stalled, gold remains entirely unaffected, pushing through $4,000 an ounce as investors continue to seek safe-haven exposure.