On Friday, the cabinet of Japanese Prime Minister Sanae Takaichi approved a massive multi-billion dollar financial stimulus package. The plan is valued at 21.3 trillion Japanese Yen, equivalent to approximately $135.40 billion. Although the new program aims to shield families and businesses from the burden of inflation, the price of Bitcoin (BTC), which is traditionally considered a Hedge against inflation, declined further in reaction.
Following the announcement, Bitcoin’s price fell by 0.8% to $85,480. This drop is an economic puzzle, as prices continue to slide from their all-time high of $126,000 reached on October 8.
Japan’s Financial Plan: Largest Since COVID
Prime Minister Takaichi launched this plan in fulfillment of her promise to pursue an expansionary fiscal policy. It is seen as an aggressive measure to strengthen the Japanese economy, which has long struggled with deflation and sluggish growth.
Key Features of the Plan
The $135 billion stimulus package includes 17.7 trillion Yen allocated for general account spending, significantly higher than the 13.9 trillion Yen allocated last year. The plan also includes tax cuts worth 2.7 trillion Yen. This is the largest financial package announced by Japan since the COVID-19 pandemic.
Inflation Target
Typically, traditional economics suggests that such large stimulus packages would increase inflation. However, the Japanese government argues that this spending will help alleviate the pain of inflation by boosting household purchasing power.
Bitcoin’s Reaction: An Economic Enigma
Conventionally, when a government releases excessive money into the market or announces large fiscal stimulus packages, the price of Bitcoin tends to rise. This is because investors view Bitcoin as a safe haven against the devaluation of Fiat currency.
But Japan’s announcement did not have a positive impact on Bitcoin’s price. This suggests that Bitcoin’s price dynamics are driven more by broader global market and liquidity conditions than by a single country’s fiscal actions. While Bitcoin has the long-term narrative of being an inflation hedge, in the short term, it primarily acts as a Risk-On asset.
Reasons for the Decline: Short-Term Market Dynamics
Analysis suggests that stronger global economic factors, rather than Japan’s stimulus plan, are the main drivers behind the Bitcoin price drop.
Global Interest Rates
While Japan has taken a ‘Dovish’ stance, releasing excessive money to combat inflation, other major central banks like the U.S. Federal Reserve may maintain a ‘Hawkish’ stance of tightening interest rates. This leads to a general expectation that Global Liquidity will remain tight. This tight liquidity environment is generally unfavorable for risk assets like Bitcoin.
Profit-Taking and Risk Reduction
Following the all-time high of $126,000 reached in October, there is a natural market sentiment of profit-taking among investors. In this environment, when news of a new economic package arrives, the market tends to reduce risk (Risk-Off). Therefore, investors temporarily sell Bitcoin for liquidity, moving out into fiat or stable currencies.
Yen Devaluation
The stimulus package is likely to further weaken the Japanese Yen (JPY). When the Yen weakens, global investors may try to move their funds to safer Dollar-backed assets, leading to short-term crypto selling.
Short-Term Volatility of the Hedge Asset
While Japan’s $135 billion stimulus package is a major economic event, the decline in Bitcoin’s price demonstrates that its valuation is currently affected by short-term market pressures, continuous profit-taking, and the contradictions of global central bank stances. Although Bitcoin holds the long-term thesis of being a good hedge against inflation, its price remains highly Volatile due to its acute sensitivity to short-term market pressures.
