The former CEO of BitMEX, Arthur Hayes, has published a new essay titled “Shikata Ga Nai,” exploring the potential for Japanese banks to sell off U.S. Treasury Bonds and the possible solutions to this issue as presidential elections approach.

The Crux of “Shikata Ga Nai”

Arthur Hayes, the former head of BitMEX, recently published an insightful essay, “Shikata Ga Nai,” delving into the potential mass sell-off of U.S. Treasury Bonds (UST) by Japanese banks and exploring viable solutions amid the impending presidential elections. Hayes suggests that the Federal Reserve (Fed) and the U.S. Treasury might have to undertake hidden dollar issuance to absorb the increasing UST supply, which could, in turn, benefit cryptocurrencies and other high-risk assets.

Economic Context and Challenges

In his essay, Hayes reflects on the dire situation facing Japanese banks, whose investments in U.S. Treasury Bonds have turned sour due to the Fed’s aggressive interest rate hikes in response to the COVID-19 pandemic-induced inflation. This scenario has led to a significant drop in UST values from 2021 to 2023, leaving Japanese banks on the brink of financial distress.
To mitigate these losses, the Fed introduced the Bank Term Funding Program (BTFP) in March 2023. This initiative spurred a rapid increase in Bitcoin’s value. However, the expiration of BTFP in March 2024 has left Japanese banks, particularly those like Norinchukin Bank, grappling with the adverse effects of rising interest rates without access to similar support mechanisms.

Potential Solutions and Market Implications

Hayes posits that the Bank of Japan (BOJ) might step in to buy these UST assets directly from commercial banks, leveraging the Foreign and International Monetary Authorities (FIMA) Repo Facility to exchange UST for freshly printed dollars from the Fed. This strategy could increase dollar liquidity in global markets, potentially boosting Bitcoin and other cryptocurrencies.
The essay further speculates on why Japanese banks are choosing to liquidate their UST holdings now. With the Fed significantly raising interest rates while the BOJ maintains a -0.1% rate, the cost of hedging dollar risk embedded in UST has skyrocketed, nullifying any potential returns. Consequently, even if the Fed were to ease its monetary policy, a mere 0.25% rate cut would not be sufficient to offset these costs and restore balance.

The Broader Impact

The proposed intervention by the BOJ, using the FIMA repo mechanism, aims to prevent a substantial surge in UST supply on the open market, which could otherwise drive up bond yields and increase the cost of servicing the U.S. national debt. By absorbing these bonds, the BOJ would help stabilize the market, albeit shouldering the risk of further UST depreciation.
This strategic maneuver underscores the interconnectedness of global financial systems and highlights the potential for increased dollar liquidity to act as a bullish trigger for cryptocurrencies. As Hayes concludes, this intricate dance between central banks and financial markets could pave the way for a more favorable environment for high-risk assets, including digital currencies.
Arthur Hayes’ “Shikata Ga Nai” offers a profound analysis of the current economic landscape, suggesting that the interplay between Japanese and U.S. financial policies could significantly influence the future trajectory of the cryptocurrency market.