#1208 Darius Dale | Bitcoin Is Falling Because Of China & Japan?
6/6/2023 · 19 min · transcript via mlx
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Key topics
— China's liquidity cycle shows deteriorating conditions with the China liquidity proxy turning slightly negative in recent months, driven by disappointing post-COVID economic recovery and structural debt overhang of 220% private sector debt-to-GDP.
— Japan's liquidity impulse is currently neutral and flatlined after large swings in late 2023 and early 2024, with high inflation readings (2 sigma on 10-year basis) suggesting further liquidity contraction ahead.
— Together, China and Japan represent roughly 35% of global liquidity contributions, making their monetary policy trajectories critical to forecasting global liquidity trends and Bitcoin price movements.
— The PBOC and BOJ are unlikely to deliver major liquidity injections in the near term despite underlying economic weakness, as both central banks signal preference for gradual easing measures rather than large-scale stimulus.
— Leading indicators differ by economy—the Chinese equity market is the strongest 3–6 month predictor of PBOC action, while Japanese inflation is the best leading indicator for BOJ liquidity decisions.
— Global liquidity impulse has turned negative, which Dale argues explains why Bitcoin has not yet recovered its year-to-date highs despite some technical strength.
Market & price signals
— China's liquidity proxy stood at $18.4 trillion with a three-month momentum that swung from draining ~$1 trillion in October 2023 to adding ~$1.5 trillion in early Q1 2024, now turning slightly negative. Japan's liquidity impulse registered a $3.5 trillion swing between October 2023 and Q1 2024 (from −$1.5 trillion to +$2 trillion) but has since flatlined. The Chinese stock market and real 10-year yield are the top leading indicators for PBOC action, both currently declining on cyclical and structural Z-score bases. Japanese inflation remains elevated at 1.4 sigma (3-year) and 2.0 sigma (10-year), suggesting negative liquidity impulse over the next 3–6 months. Global liquidity impulse is currently negative, which Dale identifies as a key headwind preventing Bitcoin from reaching year-to-date highs.
Actionable insights
— Monitor Chinese equity market weakness and real yield declines as leading indicators for PBOC liquidity shifts; a 3–6 month lag exists between these signals and actual central bank action, so front-run policy changes before they occur rather than reacting after.
— Track Japanese inflation data closely and BOJ guidance on yield curve control; elevated inflation readings suggest sustained BOJ restraint, meaning speculative yen weakness trades (which benefited Bitcoin in early 2024) are unlikely to recur soon.
— Global liquidity remains the binding constraint on Bitcoin and risk assets; with China and Japan—35% of global liquidity—both in tightening or neutral modes, expect sustained headwinds until leading indicators inflect, likely requiring further economic deterioration to trigger policy reversal.
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