Recent global central bank policies are increasingly diverging: the Bank of Japan is gradually tightening monetary policy, while the Federal Reserve has begun a rate cut cycle. Behind this counteracting move lies a potential risk that could shake the entire global financial system—its linkage to the crypto market is stronger than we imagine.

Why has the Japanese Yen become the "Arbitrage King"?

The answer is simple: it's cheap. Since Japan's bubble burst in 1990, the central bank has maintained near-zero interest rates for over 35 years, making borrowing in yen almost free. This has created the longest-lasting arbitrage opportunity in history. Speculators' play is as follows: borrow大量 yen, exchange for USD, then use it to buy US stocks, tech stocks, or other high-yield assets. This way, they can earn from asset appreciation as well as from exchange rate and interest rate differentials. Reports indicate that even top investors like Warren Buffett are leveraging this mechanism—some of his gains are not solely from insurance businesses but are achieved through carefully designed yen borrowing strategies in the capital markets.

What happens when the yen appreciates and interest rates rise?

Imagine a scenario: the Bank of Japan decides to sharply raise interest rates, from 0% to 1% or even higher. Meanwhile, the Trump administration implements a rate-cutting policy. The collision of these two forces results in a major reversal of capital flows.

Positions built on yen arbitrage will face enormous pressure. Borrowers will rush to close their positions—they need to sell assets to buy USD, then convert back to yen to repay loans. This will trigger a chain reaction: stock markets decline, the USD depreciates, and the yen appreciates. US stocks could face a deep correction, even breaking through key historical levels.

Where are the riskiest regions?

Canada, Australia, the UK, and other countries are most vulnerable within this system. Their financial institutions have long relied on yen arbitrage to support local investments and asset inflation. Once the yen appreciation cycle begins, these markets may collectively face capital outflows and asset devaluation. Even worse, these markets have indirect links to the cryptocurrency market—when traditional financial markets experience liquidity crises, risk assets (including crypto assets) are usually the first to be affected.

Will the Bank of Japan really intervene?

This is the most critical question. Historically, the Bank of Japan tends to make gradual policy adjustments. They might first raise rates modestly by 0.1-0.25% to test market reactions. The likelihood of a large rate hike is relatively low, as the central bank is well aware of the consequences—potentially triggering global financial turmoil, which would harm the Japanese economy in turn.

But markets are never short of surprises. If the Bank of Japan is forced to take more aggressive action due to domestic inflation pressures, the global markets could face a significant correction. At that point, the crypto market, as a typical risk asset, would become the first choice for capital sell-offs.

Implications for on-chain investors

Now is the time to heighten risk awareness. Pay close attention to central bank movements, exchange rate fluctuations, and international interest rate differentials—these macro factors will directly impact the liquidity of risk assets. When commodities weaken and the USD faces depreciation pressure, it usually indicates that arbitrage trades are undergoing massive adjustments. Manage your positions carefully; don’t assume history will always repeat itself—sometimes, 35 years of prosperity can be shattered within a few quarters.