The Japanese government submitted three major fiscal bills to Congress on February 20, formally establishing a structure of simultaneous tax cuts, record spending, and a debt-driven budget deficit under Prime Minister Sanae Takaichi.
This package carries both short-term risks and long-term implications for Bitcoin and the crypto market.
financial situation
The fiscal year 2026 budget has a total expenditure of 122.3 trillion yen ($793 billion), compared to the estimated tax revenue of 83.7 trillion yen, a record for the second consecutive year. The shortfall will be filled by issuing 29.6 trillion yen of new government bonds.
The government has also introduced a tax reform bill. The standard amount of income tax will be raised from 1.6 million yen to 1.78 million yen. The bill extends the mortgage tax break and eliminates the automobile acquisition tax. These measures are expected to reduce national and local tax revenues by approximately 700 billion yen annually.
The third bill would extend Japan’s special public bond law for five years starting in 2026. Japan’s fiscal law technically prohibits the issuance of deficit-producing public bonds. Only construction bonds are accepted. However, this exception has been updated repeatedly over the decades. This extension ensures that the borrowing structure remains legally intact.
Together, the three bills paint a clear picture in which national debt repayment costs will reach 31.3 trillion yen, exceeding 30 trillion yen for the first time, while revenue will further decline due to tax cuts. Japan’s national debt has already reached about 250% of GDP, the highest among developed countries.
Short-term risks: Bank of Japan interest rate hike and carry trade unwinding
The immediate concerns for crypto traders are clear. This fiscal expansion will increase pressure on the Bank of Japan (BOJ) to raise interest rates.
Former Bank of Japan board member Seiji Adachi said on February 16 that the Bank of Japan is likely to receive enough data to justify raising interest rates in April. Mizuho’s co-head of global markets went further. He told Reuters the Bank of Japan could raise interest rates up to three times in 2026, potentially starting in March. The market is currently pricing in an 80% probability of a rate hike by April.
The pattern linking the Bank of Japan’s interest rate hikes to Bitcoin’s decline is well-documented. After the March 2024 price increase, BTC has fallen by about 23%. After July 2024, it fell 26%, and after January 2025, it fell 31%. This mechanism is implemented through yen carry trading. As interest rates rise and the yen appreciates, leveraged positions financed with cheap yen are rapidly unwound. Cryptocurrencies are the first to absorb shocks due to 24/7 trading and high leverage.
BTC is currently trading around $67,000, down more than 47% from its all-time high of $126,198 in October 2025. U.S. Bitcoin ETF holders have a cost basis of nearly $84,000, with an average unrealized loss of 20%, and the ETF is set to become a net seller by 2026. Further interest rate hikes by the Bank of Japan could further increase this pressure.
However, the impact was limited as the market had already priced in a rate hike to 0.75% in December 2025, and speculative positions were now net longs of the yen, suggesting a repeat of August 2024’s violent unwinding was not guaranteed.
Long-term signals: The story of sovereign debt and digital gold
Beyond the immediate interest rate risk, fiscal policy reinforces the structural narrative that has been built around Bitcoin. Japan, the world’s most indebted developed country, is cutting taxes and increasing spending at the same time, financing both entirely with government bonds.
Tokyo-listed Metaplanet embodies this theme. The company owns more than 35,000 BTC (approximately $3 billion) and aims to reach 100,000 BTC by 2026, accumulating Bitcoin by borrowing at a weaker yen through preferred stock products. The strategy is effectively an arbitrage on Japan’s fiscal trajectory, borrowing at a weaker currency and buying fixed supply assets.
For Bitcoin, Japan’s fiscal expansion creates a contradiction. In the short term, this will put pressure on the Bank of Japan to tighten, threatening a carry trade-driven decline. In the long term, a similar fiscal trajectory undermines confidence in the sustainability of sovereign debt and strengthens BTC’s position as a hedge against currency depreciation.
The main variables to watch are the outcome of spring wage negotiations in March, the Bank of Japan’s policy decisions in April, and whether the 10-year government bond yield, currently at 2.14%, will rise again toward 3%, having retreated from January’s highs.
