Japan, Mired in ‘Debt Trap,’ Submits Record Budget, Sending Warning to Bitcoin Market

▲ The Japanese yen and Bitcoin (BTC)

The Japanese government is going “all in” on debt-fueled economic stimulus by simultaneously pushing forward a record-high budget proposal and tax cuts. Concerns are emerging that Japan’s move, despite already holding the highest debt-to-GDP ratio among advanced economies, could weaken the yen and drive interest rates higher, increasing volatility in the cryptocurrency market, including Bitcoin (BTC).

According to BeInCrypto, the Japanese government submitted a 122.3 trillion yen (approximately $793 billion) budget proposal for fiscal year 2026 to the National Diet on the 20th. This marks a record high for the second consecutive year. While revenue is projected at 83.7 trillion yen, the shortfall will be covered by issuing 29.6 trillion yen in new government bonds. Notably, 31.3 trillion yen—exceeding 30 trillion yen for the first time—has been allocated to the government bond redemption fund, intensifying a vicious cycle in which debt finances more debt.

In addition, the government has proposed tax cuts, including raising the income tax exemption threshold from 1.6 million yen to 1.78 million yen. This represents a classic expansionary fiscal policy that increases spending while reducing revenue. Japan’s debt-to-GDP ratio has already reached 250%, the highest level among advanced economies.

Cryptocurrency investors are closely watching the budget because of mounting pressure on the Bank of Japan (BoJ) to raise interest rates and the associated risk of an unwind in the yen carry trade. Historical data show that whenever the BoJ raised rates, Bitcoin’s price fell by roughly 23% to 31%. The market currently estimates an 80% probability of an additional rate hike as early as March or April. If rates rise and the yen strengthens, funds that borrowed cheap yen to invest in high-risk assets such as cryptocurrencies could rapidly exit the market.

Bitcoin is currently trading around $67,000, down more than 47% from its all-time high of $126,198 recorded in October 2025. The average purchase price of U.S. spot Bitcoin ETF holders is estimated at around $84,000, leaving them with unrealized losses of about 20%. If the BoJ proceeds with a rate hike, increased selling pressure from stop-loss orders could further accelerate the decline.

In the long term, however, skepticism over Japan’s debt sustainability could strengthen Bitcoin’s narrative as “digital gold.” A representative example is Metaplanet, a company listed on the Tokyo Stock Exchange. The firm currently holds 35,000 BTC (approximately $3 billion) and plans to accumulate up to 100,000 BTC within the year. Its strategy of borrowing weakening yen to acquire supply-capped Bitcoin is seen as a hedge against Japan’s fiscal situation.

Ultimately, Japan’s latest fiscal package is expected to act as a double-edged sword for the market. In the short term, it may pressure interest rates higher and shock asset markets, but in the long term, it could highlight Bitcoin’s value as a hedge against depreciating fiat currencies. Investors are closely monitoring the results of March wage negotiations, the BoJ’s policy decision in April, and movements in Japan’s 10-year government bond yield, currently around 2.14%.

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