Let’s first look at Japan’s long-term interest rate environment. In the early 1990s, Japan’s bubble economy burst and entered the “lost twenty years”. The economy has been sluggish for a long time, and deflation has continued. Since the late 1990s, the Bank of Japan has implemented a low interest rate policy, lowering the benchmark interest rate to a near-zero level, which has made foreign investment returns more attractive, and using yen to borrow to buy value-added assets has become a common strategy.
How does Abenomics achieve zero interest rate quantitative policy? The Bank of Japan purchased government bonds and other assets on a large scale, injected a large amount of funds into the market, lowered interest rates, and increased liquidity. In 2016, the Bank of Japan also introduced a negative interest rate policy to further reduce bank borrowing costs, drive funds to the real economy, promote consumption and investment, and improve expectations.
Due to Japan's low interest rate environment, global investors have been conducting carry trades in Japan. The specific operation is to first borrow Japanese yen, because the cost is very low in a low interest rate environment, and then convert the Japanese yen into high-interest currencies, such as Australian dollars, Singapore dollars, etc., and then invest in high-yield assets, such as bonds, deposits, etc. The profit comes from the spread between the cost of the bill and the investment income. The implementation methods include using US dollar assets as collateral, borrowing Japanese yen to buy high-priced Japanese stocks, or borrowing Japanese yen to exchange for US dollars, and buying high-yield financial instruments such as US stocks or US bonds.
This carry trade has both positive and negative effects on Japan. The positive effect is that foreign capital inflows have driven up the Japanese stock market, bringing about a "wealth effect" and shifting the economy from stagnation to slow growth, which has achieved the goal of Abenomics to a certain extent. The negative effect is the long-term depreciation of the yen, but due to proper domestic control, the public does not feel it very obviously.
As a shallow source of financing, the Japanese yen also has an impact on the global market, supporting the performance of the U.S. stock market, especially the "Seven Technology Sisters". It also plays a role in stabilizing foreign exchange in cryptocurrencies. Therefore, yen carry trading is particularly popular during the Fed's risk cycle of interest rate hikes.
So why did the Japanese stock market crash? At the end of the US dollar interest rate hike cycle, the Bank of Japan, under the leadership of the new governor Kazuo Ueda, began to raise interest rates to cope with the alarming inflation. The market's expectations and reactions led to the Bank of Japan's official 15 basis point interest rate hike, which exceeded market expectations and triggered a violent reaction. The yen rebounded from 160 to 143. A large number of arbitrage traders closed their positions and sold US dollar assets in exchange for yen to repay debts, resulting in the end of arbitrage trading.
Why did the cryptocurrency market plummet? Because Japan raised interest rates, the era of no interest rates ended, and a large number of traders closed their positions, causing short-term sharp fluctuations in asset prices, and crypto assets plummeted by 20%. The liquidation operation triggered a market sell-off, coupled with panic, which led to a sharp drop in the cryptocurrency market.
What will the future of BTC and ETH look like? Currently, the Federal Reserve is discussing an early rate cut. If the Fed is expected to cut interest rates in advance, the cryptocurrency and financial markets are expected to recover quickly. If the Fed does not mention a rate cut, the financial market may continue to be sluggish in August. Under the current circumstances, the best strategy for the cryptocurrency world may be cash is king.
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