Why the Japanese Yen Currency Stress is Back on Crypto’s Radar

Key Insights:

• The current situation mirrors the August 2024 market crash, and history could be repeating.
• The Japanese Yen could collapse, triggering the next financial contagion.
• XRP may offer a solution to Japan’s current currency woes.

The Japanese bond market signaled declining investor confidence earlier this month. Now, reports of the Japanese Yen collapse are flooding the market. Interestingly, this is not the first time these concerns have popped up.

The current Japanese Yen situation mirrors the events of August 2024. Back then, the Bank of Japan decided to raise interest rates for the first time in decades. This was after running an interesting monetary policy experiment in which rates remained at zero or very low for extended periods.

The pressure that the Japanese Yen faced back then was characterized by heavy liquidity exit from risk-on assets. This is because the low rates attracted a lot of investors who borrowed the Yen. They converted the Japanese currency into other currencies and then deployed it into investments.

The heavy Japanese Yen borrowing gave rise to what analysts describe as the Yen carry trade. Higher interest rates led to the carry trade unwind in 2024. It triggered heavy liquidity movements out of risk-on assets, and the markets crashed.

Here’s Why the Current Japanese Yen Woes May Trigger Another Market Contagion

The current situation with the Japanese Yen is quite similar to what happened in August 2024. Consequently, it is among the reasons for weak investor sentiment around risk-on assets such as Bitcoin and altcoins.

However, the risks may go beyond just risk assets. This is because Japan is currently one of the biggest holders of US treasuries. It holds over $1 trillion in US Treasuries, which the BOJ might be forced to sell to stabilize the Yen.

If the BOJ decides to sell US Treasuries, it may trigger another secondary shock, this time affecting the USD. So far, these concerns have also contributed to the decline of the US dollar index.

The DXY fell by almost 4% since Monday last week. It dropped to a low of 95.5 this week, which was its lowest level since February 2022.

Investors have been moving towards safety, seeking assets such as gold and silver to avoid potential fallout. However, the situation has analysts concerned about the long-term prospects.

Is XRP the Best Solution for the Bank of Japan?

The Japanese Yen’s current woes highlight the failings of the current monetary system. Attempts to save the currency may yield temporary relief, but the BOJ may need a more permanent solution rather than kicking the can down the road.

Interestingly, the country may already have a workable solution. Japan recently announced that it will classify XRP as a legal product starting in Q2 2026. In other words, XRP may be an ideal alternative for fixing the country’s financial situation. Some reports already indicate that the XRP crypto is being used as a form of payment.

Japan’s decision to embrace XRP may highlight a push toward the XRP ledger and potential use of stablecoins to facilitate payments. Note that there was no official statement confirming that the BOJ will embrace XRP as legal tender, hence the speculative nature so far.

Meanwhile, the recent market disruption and economic woes have crypto investors sitting on the sidelines. On the other hand, the S&P500 and the top precious metals have been soaring to new highs.

The big question now is whether currency collapse concerns will set the stage for major crypto moves. Especially considering that cryptos such as Bitcoin are deflationary.