The End of Yen Arbitrage: Can Liquidity Reconstruction Ignite a New Bull Market in Crypto?

A review of Arthur Hayes' position logic and current allocation reference.

Written by: Arthur Hayes, former co-founder of BitMEX

Compiled by: Saoirse, Foresight News

In early March 2011, I was lost in thought: what kind of costume should I wear for the seven-man rugby tournament this year? After attending several events in a row, would my body be able to handle the Taiwan Spring Scream Music Festival?

Back to reality. At that time, I was sitting at my desk in the Deutsche Bank office at the International Commerce Centre in Hong Kong, responsible for making markets for multiple MSCI Japan ETFs on the Hong Kong Stock Exchange and the Singapore Exchange. Suddenly, someone in the trading hall shouted that a massive earthquake had struck Japan. All the TVs in the office immediately switched to live broadcasts from the Tokyo branch, showing buildings shaking violently. We switched to news channels and witnessed the tsunami sweeping across Japan's northeastern coast; the scene was horrifying. Worse still, the Fukushima nuclear power plant caught fire, and we later learned that nuclear radiation nearly forced the entire evacuation of Tokyo.

The Nikkei index plummeted, dropping nearly 20% by midday; at the same time, the USD/JPY exchange rate fell sharply, approaching 70, with the yen hitting its strongest level since World War II. I absolutely hated the strengthening yen. The previous winter, I had gone skiing in Niseko, and the exchange rate of 80 yen to the dollar made local consumption exorbitantly expensive. At that time, my friend's girlfriend was a wealthy heiress who had booked all the high-end restaurants in town; she had no concept of money, and we dined at every tasting restaurant. After that, I never made that mistake again; on my next trip to Hokkaido, I stayed in hostels and ate cheap ramen. Back to the trading floor.

I was making markets for several USD-denominated MSCI Japan ETFs, and my positions naturally had yen exposure. The yen was volatile and fluctuated rapidly, and I couldn't hedge the foreign exchange risk in time. So I decided to hold my long position in USD/JPY—various traders were frantically dumping ETF sell orders, and my long position kept piling up. I remember a seasoned trader once shared a logic: Japan is located in the Pacific Ring of Fire, where earthquakes are frequent; whenever a disaster occurs, domestic institutions in Japan (especially insurance funds) urgently withdraw overseas capital, selling off overseas stocks and bonds (mostly US Treasuries and US stocks), leading to a massive inflow of yen back to the domestic market, which directly pushes up the yen exchange rate. This logic will be referenced repeatedly later.

The next day, the Nikkei opened lower again, and market panic replayed a Chernobyl-like nuclear disaster scenario, causing the yen to continue appreciating. Relying on my long foreign exchange exposure and wide bid-ask spreads, I ended up making money. Subsequently, the market gradually stabilized and rebounded; I can't recall the specific triggers. To repair the domestic economy and financial markets, Shinzo Abe introduced the landmark economic policy known as "Abenomics" in 2012, with the core goal of depreciating the yen: pushing the Bank of Japan to conduct unlimited bond purchases through yield curve control (YCC) and implementing aggressive fiscal expansion, while also replacing the management of Japan's largest pension fund, GPIF, to force an increase in overseas stock and bond allocations and a reduction in domestic asset holdings. The impact of this policy continues to stir global markets— the yen's exchange rate was directly halved.

Yen to USD exchange rate trend, with the currency value halved over more than a decade.

The white line represents the scale of Japanese government bonds held by the Bank of Japan, and the golden line represents the 10-year Japanese bond yield; the central bank's continuous aggressive bond purchases have completely suppressed long-term yields.

Normalized comparison based on early 2012: the yellow line represents the Nasdaq (NDX), which has significantly outperformed the blue line representing the Nikkei index (NKY) over the past decade, reflecting that the growth stock market in the US has been significantly stronger than the Japanese stock market.

Deliberately diluting the purchasing power of the yen once led to a global asset market frenzy: the cheap yen became a common financing currency for businesses and speculators. However, everything comes at a price, and the Japanese public is deeply resentful. Currency depreciation erodes labor value, and social order breeds chaos; although there is no direct causation, the correlation is clear. The Japanese appear gentle and restrained, but in 2022, a gunman who made his own firearm publicly shot and killed former Prime Minister Shinzo Abe, who had led the yen depreciation policy that year; this was the extreme consequence of inflation-induced chaos.

Currency depreciation also breeds xenophobia. Last winter, I went skiing on a backcountry snow trail, and a local person confronted me, accusing me of entering the mountain without buying a lift ticket. I am a certified wilderness guide and not affiliated with the ski resort; the giant notice in the ski resort lobby clearly allows hiking on backcountry snow without a lift ticket; after I tried to reason with him, he began to rant, saying that foreigners were causing various troubles in the ski area. Ironically, this ski resort is actually controlled by a Chinese-funded consortium. He resented the influx of foreign tourists into Hokkaido; I can relate to this: when the USD/JPY was at 160, even considering international airfare, skiing in Japan was more than half cheaper than in North American ski resorts, and there were even more Americans than Chinese tourists in Hokkaido. My favorite secret spots for volcanic powder snow were usually empty, but last year they were packed. However, I have hidden a few less-traveled powder spots, so I have no worries about where to ski.

Over the past decade, the continuously weakening yen has driven up global asset prices, but for the wealthy holding financial assets, this feast will eventually come to an end. Currently, the yen is the lowest-valued currency globally, and both the US and China have expressed dissatisfaction with this; ordinary Japanese voters are even more vocal in their grievances. There are three paths to untangle the yen dilemma, but the US Treasury and the Japanese political circles only favor one of them.

In the following sections, I will break down the operational logic of the three yen appreciation schemes, explain why the third one is the official preference, and then discuss the political path for implementing this scheme, and finally, the part everyone is most concerned about: after the massive influx of USD liquidity, Bitcoin and the crypto market will see significant increases.

Three schemes to boost the yen:

1. The Bank of Japan aggressively raises interest rates to eliminate the short-term interest rate differential with the US.
2. The Japanese government lobbies domestic public institutions like GPIF to adjust their investment frameworks, selling off overseas assets and increasing holdings of domestic assets.
3. [Official Preferred Scheme] The Japanese Ministry of Finance uses its holdings of US Treasuries as collateral through repurchase tools to obtain USD from the Federal Reserve, and then sells USD in the foreign exchange market to buy yen.

Before formally breaking it down, many traders may wonder: why discuss yen appreciation now? For decades, countless macro analysts have repeatedly predicted yen appreciation and the exit of yen arbitrage trades, all of which have failed. However, two weeks ago, the US and Japan's monetary authorities jointly implemented foreign exchange intervention—essentially, this is official coordinated manipulation of the exchange rate; if ordinary people did this, it would be called collusion, but sovereign states only use euphemistic terms. US Treasury Secretary Buffalo Bill Bessent publicly stated that he requested the Federal Reserve to increase the trading counterparty limits for FIMA (Foreign and International Monetary Authorities Repo Facility, which allows foreign central banks to pledge US Treasuries to borrow USD from the Federal Reserve, enabling Japan to defend the yen without selling US Treasuries in the secondary market); the Japanese Ministry of Finance also stated that it is working with the US to lower the USD/JPY exchange rate. Policymakers have already sent a clear signal: the global monetary landscape is about to be rewritten, and we must pay attention.

Unviable First Two Schemes

Scheme One: The Bank of Japan Raises Interest Rates Significantly

Exchange rates are driven by interest rate differentials; currently, USD yields are 2.75% higher than JPY. Traders borrow yen to exchange for dollars and buy US short-term Treasuries, earning stable positive arbitrage returns. The logic of no-arbitrage pricing dictates that the USD/JPY must rise and the yen must continue to depreciate to match this interest rate differential. The theoretically simplest path for yen appreciation is for the Bank of Japan to raise interest rates to levels comparable to other major central banks, eliminating the interest rate differential.

However, raising rates is nearly a dead end for the Bank of Japan. Under more than a decade of YCC policy, the Bank of Japan has been aggressively printing money to buy bonds and is now the largest holder of Japanese government bonds. Raising rates means bond prices will fall, and the central bank's holdings will suffer significant losses. Theoretically, the central bank could print unlimited money to cover losses, but once the market realizes the massive paper losses caused by the central bank's excessive money printing, the global community will lose confidence in the yen and will no longer accept it for settling essential goods such as oil, food, and medicine. Although we haven't reached that point yet, the central bank's higher-ups are aware of this disastrous hidden danger. The fear of floating losses has led the central bank to only dare to make small adjustments to interest rates; even so, the market continues to sell off long-term Japanese bonds, and the yen continues to weaken, with imported energy inflation tearing apart people's livelihoods.

The Japanese political sphere is also resistant to raising rates: fiscal deficits rely on issuing Japanese government bonds for financing, and rising yields would significantly increase interest payment costs, leaving politicians with no extra funds to provide tax relief or other benefits to win votes.

Deeper risks: if the central bank rapidly raises rates and the yen appreciates significantly, the volatility of USD/JPY will soar, forcing all traders holding global stocks and bonds financed by yen to close their positions. This happened in July 2024: the yen surged from 160 to 140 in just a few trading days. I had written two in-depth articles, "Spirited Away" and "Water, Water, Everywhere," detailing the review. At that time, the newly appointed central bank governor Ueda-domo unexpectedly raised rates and signaled continued tightening, causing market panic, and all speculators shorting the yen and going long on risk assets collectively closed their positions, leading to the dismissal of several hedge fund trading heads. The yen hit the 140 mark, and both the Nasdaq and the Nikkei index plummeted by over 10%. The Bank of Japan immediately softened its stance, stating on August 12 that future rate hikes would fully consider market conditions, effectively pausing tightening. Following this news, the yen depreciated again, and global stock markets bottomed and restarted their upward trend.

After experiencing this violent fluctuation, the Bank of Japan no longer dares to rapidly and significantly advance interest rate normalization, as it cannot afford the cost of a market collapse.

Scheme Two: Japanese Companies and Public Capital Collectively Sell Overseas Assets to Repatriate Yen

By "Japanese industrial capital," I mean companies and public institutions holding financial assets. There is a story in the book "The Nomura Dynasty": after the 1987 US stock market crash, the Japanese Ministry of Finance verbally instructed Nomura Securities to bottom fish in the US stock market. Although Nomura is a private company and has no obligation to comply with administrative orders, Japanese society values collective action, and corporate priorities often are not shareholder profits but full employment and national dignity. As long as the government sends a signal for the private sector and institutions to sell off overseas assets primarily in US Treasuries and stocks, selling dollars and buying yen to repatriate to the domestic market, the entire Japanese industrial capital will cooperate in execution.

Observing GPIF's operations can help predict signals of capital reflow. This trillion-dollar pension fund is managed by a board composed of bureaucrats appointed by various ministries. In 2014, to align with the monetary easing cycle, Abe took years to replace GPIF's management, significantly increasing the allocation of pensions to overseas stocks and bonds. GPIF manages assets ranging from $1 to $2 trillion, and after the adjustment of its investment framework in October 2014, it has continuously exchanged yen to buy U.S. Treasury bonds and stocks, creating long-term selling pressure on the yen. Speculators have thus felt secure using cheap yen to leverage global assets, completely unconcerned about yen appreciation when repaying loans.

Currently, Japan's Finance Minister Katayama-domo has publicly suggested that GPIF adjust its holdings, prioritizing domestic securities and reducing overseas assets; however, GPIF's management has openly rebutted this, stating that all operations prioritize the benefits of policyholders. This management team consists of supporters of Abe's easing policies and will never voluntarily reduce overseas assets. Back then, Abe gradually replaced GPIF's board to complete the policy shift, and now Prime Minister Takaichi can only replicate this personnel adjustment process.

For investors, the signal is clear: GPIF's holding rules will definitely be modified, forcing the sale of hundreds of billions of dollars in overseas securities, leading to a large-scale capital reflow that will push up the yen. However, this process will take years and is precisely what U.S. Treasury Secretary Buffalo Bill Bessent fears most—if Japan, as a core holder of U.S. Treasury bonds, shifts from a buyer to a continuous seller, it will directly impact the U.S. stock and bond markets that support America's global hegemony. Given that the U.S. provides security guarantees to Japan, and due to geopolitical ties, Japan cannot afford to sell off U.S. Treasury bonds on a large scale.

Everyone in the market understands that the yen is severely undervalued, and neither Japan nor the U.S. wants to see the dollar-to-yen exchange rate fall to the purchasing power parity estimate of 90 (currently at 160), as both countries cannot bear massive paper losses. After Trump's aide Waller took office as the Federal Reserve Chair, the third plan was officially released; in 2026, a new agreement between the U.S. Treasury and the Federal Reserve will be implemented, which, in addition to directly financing the Treasury's short-term bonds through the RMP tool and maintaining a policy interest rate below nominal growth rates, will give Waller full authority over the third protective plan, achieving a one-time global economic exchange rate rebalancing.

Plan Three: U.S. Treasury Bond Collateralized Repurchase Mechanism (Official Optimal Solution)

The Japanese Ministry of Finance (MOF) pledges U.S. Treasury bonds to borrow dollars through the Federal Reserve's FIMA tool, sells dollars in the foreign exchange market to buy yen, and then uses the yen to support the Japanese stock and bond markets, thereby pushing up the yen exchange rate.

Bessent's statements must be taken seriously; he is well-versed in the art of currency manipulation and gained fame in the market by following George Soros in shorting the pound. He clearly stated that the Japanese Ministry of Finance does not need to directly sell U.S. Treasury bonds to exchange for dollars to support the yen, but rather can use the Federal Reserve's FIMA repurchase tool to pledge Treasury bonds to borrow dollars and then sell dollars to buy yen. The following sections will break down the entire flow of funds and the unique potential risks of this mechanism.

Complete Flow of Funds Steps:

• The Japanese Ministry of Finance pledges its U.S. Treasury holdings to the Federal Reserve's FIMA tool to borrow dollars;
• The Ministry sells dollars and buys yen in the global foreign exchange market;
• The returned yen is invested in the domestic market to purchase Japanese government bonds and stocks.

This policy has four core impacts:

• The Federal Reserve prints money out of thin air to issue FIMA dollar loans, expanding its balance sheet in line with the outstanding repurchase balance;
• The dollar-to-yen exchange rate declines, strengthening the yen;
• The Ministry of Finance buys Japanese bonds on a large scale, lowering Japanese bond yields;
• Yen funds flow into the stock market, pushing up Japanese stock prices.

Two Major Affected Parties Under This Mechanism:

• Japan bears the loans of American taxpayers, and due to geopolitical considerations, this debt will never be repaid, equivalent to unlimited money printing, ultimately pushing up inflation in financial assets and physical goods. The U.S. cannot force its Asia-Pacific allies to repay debts, weakening Japan's willingness to invest in defense.
• All speculators shorting the yen: once the exchange rate trend is clear, they must concentrate on closing their positions. However, the entire tool will smooth out the volatility of the dollar-to-yen exchange rate, allowing yen arbitrage trades to exit in an orderly manner over several years without collapsing suddenly.

The core obstacle to this plan not being implemented yet: the current borrowing limit for a single counterparty using the FIMA tool is $60 billion. Previously, the joint intervention by the U.S. and Japan in the exchange rate involved over $100 billion, which only temporarily pushed the yen up by 5%, and the effect dissipated within days. To effectively support the yen, the borrowing limit must be completely lifted, and access must be relaxed to allow large Japanese public investment institutions like GPIF to use this tool.

The management authority of the FIMA tool belongs to the Federal Reserve's Foreign Exchange Committee. During the COVID-19 pandemic, the FOMC delegated the authority to adjust the tool's rules to this committee, whose voting members include Chair Waller, Vice Chair and New York Fed President Williams, and Vice Chair of the Board Jefferson. The committee can convene at any time, does not disclose meeting minutes or voting records, and the market can only passively receive the results of adjustments.

The committee will certainly execute Bessent's demands: Trump and Waller maintain regular communication, and Treasury Secretary Bessent has clearly informed the White House of the entire plan to adjust FIMA rules and balance the dollar-to-yen exchange rate, which Trump fully endorses. The White House will directly issue instructions to Waller; Waller's past actions have proven that he will only cater to the upper echelons' will, with no independent policy stance. New York Fed's Williams continues to expand the balance sheet through the RMP tool; the market's two-year U.S. Treasury yield is 0.5% higher than the effective federal funds rate, clearly signaling a rate hike, but Waller still refused to tighten at the July FOMC meeting, instead forming five working groups to slowly discuss policy optimization, with implementation still far off. Like his predecessors Powell and Yellen, he is completely obedient to the White House.

The difference between the two-year U.S. Treasury yield and the effective federal funds rate, with the market continuously pricing in rate hike expectations, but the Federal Reserve taking no action.

I cannot predict when Waller will convene the committee, lift the FIMA limits, and initiate unlimited money printing to intervene in the dollar-to-yen exchange rate, but the probability of this happening is extremely high. I am continuously increasing my positions in assets benefiting from the Federal Reserve's balance sheet expansion: Bitcoin, physical gold, and gold mining stocks.

Liquidity Scale and Cryptocurrency Market Forecast

The larger the money printing scale, the higher the Bitcoin price increase. The core question: can this FIMA tool release trillions of dollars in liquidity, enough to spark a bull market in the cryptocurrency space?

Currently, only U.S. Treasury bonds can be used as collateral for FIMA; future rules may be relaxed. We will only calculate the current available collateral scale:

• Japanese government holdings of U.S. Treasury bonds: $1.143 trillion
• GPIF holdings of U.S. Treasury bonds: $230 billion Total: $1.373 trillion

For reference: during the COVID-19 easing cycle from 2020 to 2021, the Federal Reserve's balance sheet expanded by about $4 trillion, and the liquidity power was evident in the market.

The white line represents the Federal Reserve's balance sheet size, and the gold line represents Bitcoin's price, with both trends highly correlated.

In my previous articles, I mentioned that global AI industry investments have entered a phase of ineffective capital consumption. The Trump administration hopes to attract new liquidity into U.S. AI capital expenditures rather than inflating cryptocurrency prices, but I am not optimistic about this plan: currently, leading AI companies have negative capital returns, whether they are U.S. supercomputer manufacturers or local AI laboratories, they cannot achieve profitability against China's token cost. Inefficient capital deployment will ultimately lead to severe inflation, and Bitcoin prices will fully reflect this portion of ineffective liquidity. Recently, gold has continued to rebound from low levels, indicating that funds are more willing to flow into hard assets with monetary properties rather than into cash-burning projects like OpenAI or Musk's space data centers.

Gold price trends, rebounding first under expectations of liquidity easing.

Cryptocurrency Allocation Strategy

Many readers are most concerned about the Maelstrom fund's position layout, but the macro logic is the core basis for establishing positions. Bessent's policy signals are worth the attention of the entire market; he is proficient in currency manipulation; adjusting FIMA rules does not require elected politicians' votes or Senate hearings, but only a resolution from the Federal Reserve's Foreign Exchange Committee can initiate massive dollar printing.

When I saw the news of Bessent calling for reforms to the FIMA tool, I immediately generated strong bullish expectations. Mainstream macro analysts unanimously believe that the dollar-to-yen trend will completely reverse, and positions must be laid out in advance. Money printing is a political means for authorities to solve economic dilemmas, and the White House's policy direction is very straightforward: guide residents to enter the market and buy risk assets. Bessent has already laid out the entire channel for releasing liquidity. I choose to increase my positions in risk assets accordingly.

We have already heavily invested in Bitcoin, and the next step is to look for more resilient cryptocurrency targets:

1. Ethereum: A value pit among large-cap coins, all mainstream cryptocurrencies are expected to hit new historical highs in 2025, except for Ethereum; at the same time, Ethereum will become the underlying secure settlement layer for real-world assets (RWA), with ample narrative space.
2. Ethena: The ENA token price has plummeted over 90%. Once the expansion of dollar liquidity drives Bitcoin up, the basis yield will quickly recover, and a large amount of funds will flow into USDe. The extremely low cost of chips can drive $ENA to rise rapidly, making it the preferred choice for short-term ambush.

I have not yet cleared my cash and am fully invested in cryptocurrency assets, needing to wait for Waller's formal adjustment signal for the FIMA rules to land. Pay attention to market movements: informed internal funds will lay out positions in advance, and gold and the dollar-to-yen exchange rate will show early movements before policy announcements. All asset classes have experienced pre-trading policies, and the foreign exchange and gold markets will be no exception.

The era of cheap yen has completely come to an end, and I welcome this—too many foreign tourists crowding the hidden powder snow valleys of Hokkaido. I advise all snowboard enthusiasts to switch to splitboard in the backcountry.

Note [1] Taiwan Spring Scream Music Festival, the highest quality niche music festival in Asia, I really love Taiwan. [2] Going long on Japanese ETFs = going short on the USD, going long on the JPY; going short on Japanese ETFs = going long on the USD, going short on the JPY. [3] BOJ: Bank of Japan; GPIF: Government Pension Investment Fund of Japan. [4] FIMA: Foreign and International Monetary Authorities Repo Facility. [5] MOF: Ministry of Finance of Japan. [6] Short-term government bonds: U.S. Treasury bills with a remaining maturity of less than one year. [7] RMP: Reserve Management Purchasing, which refers to the Federal Reserve's money printing tool.