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Though looser policy usually favors risk assets, expectations for rate cuts from the Bank of Japan can oddly become negative for cryptocurrencies. Usually only after great stress—such as a tightening overshoot, rising JGB yields, bond market turbulence, or growing recession fears—do these hopes surface. Markets see expected reductions in this context as a sign that "things are breaking," which encourages widespread de-risking across assets instead of appreciation of softer conditions.
Often bearing most hardship during such events, crypto is a high-beta and very leveraged asset. Investors decrease risk exposure, hence causing forced deleveraging and liquidations that put cryptocurrency at the front of the sell-off queue. Though easier monetary policy would theoretically have some advantages, early growth or stability issues control any possible gains, therefore severely lowering prices, notwithstanding the attractiveness of the easier monetary policy.
The yen carry trade gives yet another layer of volatility: a JGB sell-off or concerns about debt sustainability can cause severe yen swings and quick unravelling of yen-funded positions. While a macro-recession channel strengthens risk-off behavior, treating crypto more like a cyclical tech asset than a monetary hedge, this produces funding stress that spreads into Bitcoin and Ethereum. Only after the severe stress subsides might the favorable impacts of continuous relaxation eventually support cryptocurrency prices.
