Bitcoin BTC$85,533.71 is not the only asset taking a beating this quarter.

The Japanese yen (JPY) is also down 157.20 per U.S. dollar, a big move for a major fiat currency, prompting FX traders to await intervention from the Bank of Japan (BOJ) to stem the decline.

But why are we discussing FX? It's because, historically, yen weakness has been linked to risk-on sentiment — when traders borrow yen at low interest rates in Japan and convert it into other currencies, such as the U.S. dollar, to invest in higher-yielding assets. This activity puts downward pressure on the yen.

A declining yen further boosts this dynamic, since it means fewer dollars are needed to repay the yen loan, thereby increasing the overall profitability of the carry trades.

Conversely, a strengthening yen dented the appeal of carry trades and signaled broad-based risk-off. For example, during the August 2024 crash, bitcoin fell from roughly $65,000 to $50,000 over the course of a week. That happened as the BOJ hiked rates for the first time in a decade, pushing the yen higher.

So, it’s natural to instinctively think that the latest decline in the yen is good news for BTC and risk assets in general. After all, the BOJ's official interest rate currently stands at 0.5%, compared to 4.75% in the U.S., creating a strong carry-trade incentive. There are reports of Japanese retail investors chasing the high-yield Turkish lira.

That said, Japan, facing debt issues, no longer offers the stable macroeconomic environment that once underpinned the yen’s role as both a carry currency and haven. This reality challenges the likelihood of a broad-based surge in yen-funded carry trades and risk-on sentiment across financial markets, including BTC and altcoins.

Fiscal strain causes yen volatility

Experts say the yen’s ongoing decline reflects underlying fiscal strain manifesting in the currency market.

Japan is one of the most indebted nations globally, with a debt-to-GDP ratio of around 240%. Concerns about this have intensified amid the post-COVID inflation surge and the recently elected Prime Minister’s promise of expansionary fiscal policy, which means more borrowing, more debt issuance, and higher yields. Just today, the government approved a $135 billion fiscal stimulus package.

It means that the path of least resistance for the Japanese government bond yields is on the higher side. Fiscal issues and inflation concerns have already lifted the 10-year Japanese government bond yield, which lingered near or below zero for nearly six years until 2022, to 1.84%, the highest level since 2008.

The 20- and 30-year yields also hover at multi-decade highs, alongside a weakening yen, marking a total breakdown in the positive yield-exchange rate correlation, a sign that fiscal issues are dominating market sentiment.

In essence, Japan is now cornered: it risks a full-blown fiscal crisis if it allows yields to keep rising. At the same time, it faces a full-blown yen crash and a surge in imported inflation if it caps yields and keeps rates lower.

As economist Robin Brooks, senior fellow in the Global Economy and Development program at the Brookings Institution, put it: “If Japan stabilizes the Yen by allowing yields to rise, there's a fiscal crisis. If it keeps rates low, the Yen goes back into a devaluation spiral. Too much debt is a killer..."

All this means potential for high volatility in the yen, which weakens its historic appeal as a funding and haven currency, and a macroeconomic environment, which isn't as conducive as it used to be for traders to consider the yen as a funding currency.

Swiss franc, a better risk barometer

Meanwhile, currencies such as the Swiss franc are emerging as new carry plays, as Marc Chandler, chief market strategist at Bannockburn Global Forex, told CoinDesk early this year.

The CHF looks more attractive as a carry currency than the yen, as Switzerland's benchmark interest rate is 0%. If that's not enough, the 10-year Swiss government bond yield hovers at 0.09%, the lowest among developed economies, according to TradingView.

It means that going forward, BTC traders may be better off tracking CHF pairs for broad risk-on/risk-off cues.