[Bitop Review] Japan Bank’s Bond Sale Sparks Dollar Liquidity Speculation, Cryptocurrencies Poised for New Bull Run

On June 21, the “Original Crypto King” Arthur Hayes wrote on his personal blog that Norinchukin Bank, the fifth-largest bank in Japan, announced that it would sell $63 billion worth of US and European bonds.

Widening US-Japan Interest Rate Differential, Rising Hedging Costs

Hayes pointed out that the Bank of Japan’s large-scale sale of US Treasuries was due to the widening US-Japan interest rate differential, which has significantly increased the hedging costs of holding US Treasuries in foreign exchange. Holding these bonds has already begun to lose money. US Treasury Secretary Janet Yellen is likely to ask the Bank of Japan to buy these sales through the Fed’s FIMA repurchase facility to prevent US Treasury yields from rising sharply and causing financial market turmoil.

Why Now?

The Fed signaled in late 2021 that it would begin raising policy rates in March 2022. Since then, US Treasuries (USTs) have begun to collapse. It’s been more than two years, so why would a Japanese bank choose to acknowledge its losses now after two years of pain?

Hayes points out that this is because Norinchukin Bank’s foreign exchange hedging purchases of US Treasuries have turned from slightly positive to significantly negative. Prior to 2023, the interest rate differential between the dollar and the yen was negligible. Then, the Fed diverged from the Bank of Japan (BOJ) by raising rates, while the BOJ stuck to its -0.1% rate. As the gap widened, the cost of hedging dollar risk embedded in US Treasuries exceeded the higher yield.

“Interest rates in the U.S. and Europe have risen, and bond prices are down. This reduced the value of high-priced (low-yielding) foreign bonds that Norinchukin purchased in the past, causing its paper losses to swell.”

Other Japanese Banks May Follow Suit and Dump a Total of $450 Billion of US Treasuries

Hayes says Norinchukin Bank is the first bank to “crack” and announce that it must sell bonds. This could lead to other Japanese banks following suit and selling their US Treasury holdings.

According to the International Monetary Fund’s (IMF) Coordinated Survey of Portfolio Investment, Japanese commercial banks held about $850 billion in foreign bonds in 2022 (this figure has risen to nearly $1.2 trillion in 2023). This includes nearly $450 billion in US bonds and about $75 billion in French bonds — a figure far exceeding the bonds issued by other major eurozone countries they hold.

Hayes says that Yellen will not allow these bonds to be sold on the open market and cause US Treasury yields to soar. She will ask the Bank of Japan (BOJ) to buy these bonds. The BOJ will then utilize the Foreign and International Monetary Authorities (FIMA) repurchase facility established by the Fed in March 2020. The FIMA repurchase facility allows central bank members to collateralize US Treasuries and receive newly printed dollars.

Severe Losses Make US Treasury Sales Inevitable

Hayes even compare the situation at Norinchukin Bank to the FTX collapse, saying it was worse than the multi-party romance participants at FTX/Alameda. From a market value perspective, US Treasuries purchased in 2020–2021 have fallen 20% to 30%. In addition, foreign exchange hedging costs have increased from negligible to over 5%. Even if Norinchukin Bank believes the Fed will cut, a 0.25% Fed rate cut isn’t going to reduce the hedging costs or elevate the bond prices enough to staunch the bleeding. Therefore, they must dump USTs.

Massive Printing Will Provide Liquidity, Cryptocurrency Prices Poised to Rise

The Bitop market analysis team believes that if the Fed prints money on a large scale to repurchase Japanese-sold US Treasuries. It will bring a new round of dollar liquidity to the cryptocurrency market, fueling a new cryptocurrency bull run. In order to maintain the current dollar-based financial system, the Fed must increase the supply of dollars, and this will undoubtedly push up the prices of crypto assets, including Bitcoin.

Disclaimer: None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.