On February 20, the Japanese government submitted three major budget bills to parliament. They enshrine a course of simultaneous tax cuts, record government spending, and deficit financing through debt under Prime Minister Sanae Takaichi.
This package carries both short-term risks and long-term consequences for bitcoin and the entire crypto market.
Fiscal Picture
Japan’s 2026 budget foresees spending at ¥122.3 trillion, or about $793 billion. This is a new record and the second consecutive year with such spending. At the same time, tax revenues are expected at ¥83.7 trillion. The gap will be covered by issuing bonds for ¥29.6 trillion.
In parallel, the government introduced a tax reform bill. The non-taxable minimum for income tax is raised from ¥1.6 million to ¥1.78 million. Mortgage benefits are extended. The car purchase tax is abolished. In total, this will reduce budget revenues by about ¥700 billion per year.
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A separate bill extends the rule allowing the issuance of deficit bonds. Formally, Japanese law prohibits covering deficits with debt. Only construction bonds are allowed. But this exception has been extended for many years. The new term is set for another five years starting in 2026.
As a result, debt servicing costs rise to ¥31.3 trillion and for the first time exceed ¥30 trillion. Revenues are declining due to tax measures. The country’s public debt is already about 250% of GDP. This is the highest level among developed economies.
Short-Term Risk: BOJ Rate Hike and Carry Trade Reversal
For crypto traders, the immediate risk is obvious. Fiscal expansion increases pressure on the Bank of Japan and raises the likelihood of further rate hikes.
Former BOJ board member Seiji Adachi said on February 16 that by April the regulator will likely have enough data to raise rates. The co-head of global markets at Mizuho told Reuters even more. According to him, the BOJ could raise rates up to three times in 2026, possibly starting as early as March. The market currently estimates the probability of a hike by April at about 80%.
The link between BOJ rate hikes and bitcoin sell-offs is already visible in the data. After the hike in March 2024, BTC fell by about 23%. In July 2024, the drop was about 26%. After the January 2025 decision, the decline reached 31%.
The mechanism works through yen carry trade. When the rate rises and the yen strengthens, positions funded by cheap yen unwind quickly. The crypto market usually takes the first hit due to 24/7 trading and high leverage.
Currently, BTC is trading around $67,000. This is more than 47% below the October 2025 all-time high of $126,198. Holders of US bitcoin ETFs are on average at an unrealized loss of about 20% with an average entry price of about $84,000. In 2026, ETFs have already become net sellers. A new BOJ rate hike could increase the pressure.
At the same time, the December 2025 hike to 0.75% had a limited impact. The market had largely priced it in. In addition, speculative positions are now net long on the yen. This means a repeat of the sharp carry trade reversal, as in August 2024, is not inevitable.
Long-Term Signal: Sovereign Debt and the Digital Gold Narrative
Beyond the short-term rate risk, the budget package reinforces a longer-term narrative around bitcoin. Japan—the most indebted developed economy in the world—is simultaneously cutting taxes and increasing spending, financing it with new bonds.
This logic is reflected in the strategy of Tokyo’s Metaplanet. The company owns more than 35,000 BTC, equivalent to about $3 billion, and plans to increase holdings to 100,000 BTC in 2026. To do this, it raises capital through preferred instruments in a weakening yen and directs funds to buy bitcoin. Essentially, this is a bet on Japan’s fiscal trajectory: borrow in a currency at risk of devaluation and buy an asset with a fixed supply.
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For bitcoin, a paradox arises. In the short term, fiscal expansion increases pressure on the BOJ and raises the risk of tightening, which can trigger sell-offs through a carry trade reversal. In the long term, the same dynamic undermines confidence in the sustainability of sovereign debt and strengthens BTC positioning as a hedge against currency depreciation.
Key factors to watch are the results of the spring Shunto wage negotiations in March, the BOJ rate decision in April, and the yield dynamics of 10-year JGBs. It is now about 2.14% after pulling back from January highs. The question is whether the move toward 3% will resume.
