Arthur Hayes says Bitcoin’s next rally is less about cryptocurrency-specific catalysts and more about whether U.S. policymakers are forced to respond to rising tensions in Japanese currency and government bond markets. The stress, he believes, will ultimately translate into up-to-date dollar liquidity.

In his latest essayIn “Woomph,” published on Wednesday, Hayes characterizes the recent weakness in the yen and the sell-off in long-term Japanese government bonds (JGBs) as a kind of systemic “alarm sound” ahead of official intervention.

“Financial markets rose as the yen weakened and JGB prices collapsed,” he wrote. “Therefore, analyzing the fragility that the Yen and JGB are causing to global markets at this time is extremely important. Will the collapse of the Yen and JGB markets result in some kind of money printing by the BOJ or Fed? The answer is yes, and this essay will explain the mechanism of the mentioned intervention that was announced last Friday.”

Hayes lays out a step-by-step scenario in which the New York Fed increases bank reserves, sells dollars for yen, and then uses those yen to purchase JGBs, effectively stabilizing both USD/JPY and the long-end Japanese yield while keeping currency risk and duration risk on the Fed’s balance sheet.

According to him, the signature will be evident in a specific item: “Assets denominated in foreign currencies” in the weekly release of the Fed’s balance sheet in the H.4.1 format. Hayes argues that if this number increases rapidly, it would suggest that the Fed has begun to accumulate foreign currency assets, potentially JGBs, along the intervention path he has described.

The motive of politics, he adds, is not charity. Hayes points to Japan’s immense holdings of foreign assets and its role as a major holder of U.S. Treasuries, arguing that rising JGB yields could draw Japanese capital home and put pressure on U.S. borrowing costs. Japanese political debates concern the weakness of the yen and the path of tightening the BOJ’s monetary policy, and the BOJ itself kept its interest rates at 0.75% on January 23.

Hayes focuses on what he calls a deliberately telegraphed signal: market chatter that U.S. officials have “checked prices” with Wall Street dealers, which language traders often interpret as a prelude to currency intervention. The Financial Times reported that “interest rate controls” in the U.S. helped trigger a edged move in the yen and fueled speculation about coordinated action.

It also suggests that the BOJ’s decision to retain support, despite what it describes as a market requiring stronger defense of the yen and bond markets, has improved the chances of US aid. Japan’s political context also matters here: Sanae Takaichi dissolved parliament and scheduled early elections for February 8, which was widely commented on in the international media in recent days.

Why does Hayes tie it to Bitcoin

For Hayes, the story of stress in Japan is ultimately a story of liquidity, and he argues that bitcoin remains tied to the direction of the Fed’s balance sheet. “This discussion on Japanese financial markets is important because for Bitcoin to break out of a sideways trend, it needs a healthy dose of money printing,” he wrote.

“I will present a theory that the actual flow of money through the corroded veins of the global monetary system has not yet supported. Over time, I will monitor changes in certain items on the Fed’s balance sheet to confirm my hypothesis.”

In the essay, he also points to shorter-term complications: The rapidly appreciating yen has historically been consistent with risk positioning as leveraged traders withdraw from yen-financed trades, a lively that he believes could drag Bitcoin ahead of any liquidity push.

Hayes’ tactical conclusion is to remain patient until evidence appears on the balance sheet. He says he exited leveraged Bitcoin proxies including Strategy (MSTR) and Japanese-listed Metaplanet ahead of the yen’s move, and will consider re-entering the market if the “Foreign Currency-Denominated Assets” position begins to surge.

Moreover, he writes that his Maelstrom fund continues to add to Zcash (ZEC), keeping other “quality DeFi positions” unchanged and only adding further when balance sheet growth from the intervention becomes evident.

At the time of publication, Bitcoin was trading at $89,137.

Featured image created with DALL.E, chart from TradingView.com