On February 20, 2026, the Japanese government under Prime Minister Sanae Takaichi submitted three major fiscal bills to parliament, formalizing a policy of simultaneous tax cuts, record spending, and debt-financed deficits. This package presents a dual-edged sword for cryptocurrency markets, particularly Bitcoin, with significant short-term risks and longer-term implications.
The 2026 budget totals a record ¥122.3 trillion ($793 billion) in spending, against projected tax revenue of ¥83.7 trillion. To fill this gap, the government plans to issue ¥29.6 trillion in new bonds. A separate tax reform bill raises the income tax threshold and extends mortgage breaks, reducing annual tax revenue by approximately ¥700 billion. A third bill extends Japan's special deficit bond law for five years, legally enabling this borrowing structure despite fiscal law technically prohibiting deficit bonds. Japan's national debt already stands at roughly 250% of GDP, the highest among developed nations.
The immediate concern for crypto traders is the increased pressure this fiscal expansion places on the Bank of Japan (BOJ) to raise interest rates. Former BOJ board member Seiji Adachi stated on February 16 that the central bank will likely have enough data to justify a rate hike in April. Mizuho's global markets co-head suggested the BOJ could hike up to three times in 2026, potentially starting in March. Markets currently price an approximately 80% probability of a hike by April.
A well-documented pattern links BOJ hikes to Bitcoin selloffs, driven by the unwinding of the yen carry trade. When rates rise and the yen strengthens, leveraged positions funded in cheap yen unwind rapidly, with crypto often absorbing the shock first due to its 24/7 trading and high leverage. Bitcoin dropped roughly 23% after the March 2024 hike, 26% after July 2024, and 31% after January 2025. Bitcoin currently trades around $67,000, down over 47% from its October 2025 all-time high of $126,198. US Bitcoin ETF holders sit on average 20% unrealized losses with a cost basis near $84,000, and ETFs have turned net sellers in 2026.
However, the December 2025 hike to 0.75% had a limited impact as it was largely priced in, and current speculative positioning is net long yen, suggesting a repeat of past violent unwinds is not guaranteed.
Beyond the short-term volatility risk, Japan's fiscal trajectory reinforces a longer-term structural narrative for Bitcoin as a hedge against currency debasement and sovereign debt unsustainability. Tokyo-listed company Metaplanet embodies this thesis, holding over 35,000 BTC (roughly $3 billion) and targeting 100,000 BTC in 2026. Its strategy involves borrowing in a weakening yen to accumulate Bitcoin, effectively arbitraging Japan's fiscal path.
Key variables to watch include the spring wage negotiation (Shunto) results in March, the BOJ's April policy decision, and the movement of 10-year Japanese Government Bond yields, currently at 2.14% after retreating from January highs.
