The yen exchange rate is approaching a ten-year low, and Japanese government bonds are experiencing a historic sell-off. Prime Minister Sanae Takaichi has quietly initiated the most ambitious regulatory reforms in the Asian cryptocurrency market amid massive fiscal stimulus and military budget expansion.
As Takaichi introduced a 21.3 trillion yen economic stimulus plan, the Japanese market witnessed a rare "triple whammy" of stocks, bonds, and currency.
The Nikkei 225 index erased all gains since her appointment, the 30-year government bond yield hit a historic high, and the yen exchange rate approached a critical point that could trigger central bank intervention. The market is expressing profound doubts about this new prime minister's policy mix.
1. Policy Shift
● Since taking office, Takaichi has implemented a series of radical economic and fiscal policies. These policies form the macro backdrop of the current turmoil in the Japanese market. The core of her policy includes two seemingly contradictory directions: on one hand, attempting to activate the domestic economy through massive fiscal stimulus, and on the other hand, continuously increasing the defense budget and advancing military capability.
● In the realm of people's livelihoods and the economy, facing a negative growth situation with a 1.8% year-on-year decline in GDP for the third quarter, Takaichi's cabinet launched an economic stimulus plan of up to 21.3 trillion yen. At the same time, she proposed a two-year suspension of the food consumption tax, temporarily reducing it from the current 8% to zero by the fiscal year 2026.
● Alongside the livelihood and economic policies is a radical shift in Japan's defense policy. The defense budget for the fiscal year 2026 will exceed 9 trillion yen for the first time, increasing by approximately 334.9 billion yen from the previous year, marking a historic high with 14 consecutive years of growth.
● Key budget focuses include building a coastal defense system centered around a large number of drones, procuring hypersonic missiles, and improving the Type 12 anti-ship missile, among others.
2. Market Turmoil
● Takaichi's policy mix has triggered a violent reaction in the financial markets. This reaction is reflected not only in the volatility of asset prices but also in investors' deep concerns about the sustainability of Japan's policy path. Market worries about Japan's fiscal situation are concentrated in the government bond market. The yield on 30-year Japanese government bonds once surged to 3.35%~3.38%, reaching the highest level on record.
● Analysts view this as a "vote of no confidence" in fiscal discipline. The head of global currency research at Deutsche Bank even compared the current trends in the Japanese market to the "Truss storm" in the UK in 2022. The Japanese stock market has also not been spared. Contrary to the traditional belief that "a weaker yen benefits export stocks," the Nikkei 225 index has continued to decline against the backdrop of yen depreciation and soaring government bond yields.
● Within seven weeks of Takaichi's appointment, the yen has depreciated by about 6% against the dollar, while the US-Japan 10-year yield spread has narrowed, showing a "dislocation from fundamentals."
3. Structural Changes in the Cryptocurrency Market
● Just as traditional financial markets are unsettled by policy uncertainty, Japan is quietly advancing what may be Asia's most ambitious regulatory reform in the cryptocurrency space. The core of this reform is the adjustment of the tax system and the redefinition of asset classes.
● Japan plans to move cryptocurrencies from the current "miscellaneous income" category to the same category as stocks, implementing a unified tax rate of 20%, replacing the current progressive tax rate that can be as high as 55%. This change is expected to significantly reduce the tax burden on investors and may attract a large influx of institutional and retail funds back to the Japanese market.
● The Financial Services Agency (FSA) of Japan plans to submit a legal amendment to reclassify cryptocurrencies as financial products, allowing them to be subject to insider trading rules, disclosure standards, and investor protection measures under the Financial Instruments and Exchange Act.
4. Market Implications of the New Regulatory Framework
The changes in Japan's cryptocurrency regulatory framework are not merely technical adjustments; they reflect a shift in the understanding of the nature of digital assets and may bring profound structural impacts to the market.
● In terms of legal status, cryptocurrencies will gain a positioning closer to traditional financial assets. This means that market transparency and investor protection measures will be strengthened. Under the new framework, Japan may introduce ETF products linked to cryptocurrencies, further enriching investment channels.
● The impact of the tax rate adjustment is more direct and significant. Currently, Japan taxes cryptocurrency gains as "miscellaneous income" using a progressive tax rate, with the maximum rate potentially exceeding 55% when local taxes are included, far higher than the unified 20% tax rate for stocks and bonds.
● This unequal tax system has long been considered a major obstacle to the development of Japan's cryptocurrency market. The share of Japan's cryptocurrency trading volume in the global market has dropped from a peak of 40% in 2017 to currently less than 5%. After the implementation of the new policy, Japan's cryptocurrency market trading volume is expected to grow 3-5 times within three years.
5. Policy Transmission and Regional Impact
Japan's policy changes not only affect the domestic market but may also transmit through various channels to the entire Asia-Pacific region, particularly in the cryptocurrency field, potentially creating significant demonstration effects.
● As the world's third-largest economy, Japan's policy shift has a regional demonstration effect. South Korea and Singapore have indicated that they will closely monitor the effectiveness of Japan's reforms and consider making similar adjustments. This regional regulatory coordination is expected to create a more unified and friendly environment for the Asia-Pacific cryptocurrency market.
● Japan is also actively positioning itself in the stablecoin sector. Japan may soon approve its first yen-pegged stablecoin, with major financial institutions like SBI Holdings planning to launch related products in early 2026. This will pave the way for seamless integration between cryptocurrencies and fiat currencies.
● Notably, these regulatory reforms in the cryptocurrency market form a subtle contrast to Takaichi's overall policy agenda. Against the backdrop of fiscal stimulus and military expansion raising market doubts about the sustainability of Japan's debt, the liberalization reforms in the cryptocurrency market stand out.
6. Risks and Uncertainties
Despite the promising outlook for Japan's cryptocurrency regulatory reforms, multiple risks and uncertainties remain during the implementation process, which may affect the final policy outcomes and market reactions.
● The 2026 timeline is considered quite ambitious; for "a bureaucratic system that still partially uses fax machines," timely implementation of all reform measures will be a challenge. Current political attention in Japan may be diverted to other pressing issues. The Takaichi government is busy addressing rising prices and preparing the budget for the fiscal year 2026.
● There are views within the government that the likelihood of dissolving the House of Representatives before the establishment of the fiscal year 2026 budget is low. This may affect the priority of cryptocurrency market regulatory reforms on the legislative agenda. The market's reaction to cryptocurrencies also needs to be observed cautiously. Although Bitcoin prices rose by 2.3% and Ethereum by 3.1% after the tax reform announcement, this short-term market sentiment may mask structural challenges.
The retail adoption rate of cryptocurrencies in Japan remains relatively low, with a study showing that 88% of Japanese residents have never owned Bitcoin.
The steepening of the Japanese government bond yield curve, the yen exchange rate hovering on the edge of intervention, and the violent fluctuations of the Nikkei index—these are the market scars left by the "sell Japan" trade.
However, in the undercurrents of the cryptocurrency world, Japan is quietly deploying another strategy. When the unified tax rate of 20% is finally implemented, and when Bitcoin gains legal status as a financial product, the funding landscape of the Asian cryptocurrency market will face a reshaping.
On one side of the market's balance is the traditional economy burdened by debt expansion, and on the other side is the digitally enlightened future with open regulation. The outcome of this policy "gamble" will define the economic face of Japan for the next decade.
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