Behind the Market Bloodbath: Is That 30-Year Massive Arbitrage Trade in Trouble?

Today, the crypto market underwent a thorough cleansing. The BTC price briefly touched $85,600, and more than 200,000 traders across the network were liquidated. Traditional financial markets were not spared either—the Nikkei 225 index broke through the 50,000-point mark, the yen surged rapidly against the US dollar, and Japan’s 2-year government bond yield soared to its highest level since the 2008 financial crisis.

The source of this chain reaction collapse surprisingly points to a statement made by the Governor of the Bank of Japan.

Many people are unaware that, over the past 30 years, there has been a $20 trillion arbitrage trade: borrowing yen in Japan at near-zero interest rates, converting it into US dollars, and allocating it to high-yield assets such as US stocks, US bonds, and crypto assets to profit from interest rate differentials. Japan’s long-term ultra-low interest rate policy has turned the yen into the world’s cheapest financing tool. Hedge funds, investment banks, pension institutions, and even individual investors have been using this leverage frantically. What does $20 trillion mean? It’s five times Japan’s annual GDP, accounts for 18% of the global economy, and is one-third the total market capitalization of the US stock market.

Once the yen raises interest rates, the entire game changes.

First, financing costs rise. In the past, borrowing yen was almost free; after a rate hike, costs could rise to 0.5% or even higher, squeezing arbitrage margins. Second, there’s the exchange rate risk. Suppose you borrow 1 billion yen at an exchange rate of 150 to buy BTC. If the yen appreciates to 145,