Back in early December, the Nikkei reported that 40% of cryptocurrency trading in Oct-Nov was yen-denominated. This means that while South Korea's "bitcoin zombies" were a remarkable media sideshow, it was Japanese traders who have come to account for nearly half of cryptocurrency trading since China started to shut down its own crypto exchanges. The report explicitly showed that Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped) are driving the cryptocurrency market.

Commenting on this dominance of Japanese traders, Deutsche Bank last week observed that "the emergence of “Bitcoin wealthy” might ignite the “speculative spirit” of Japanese people with strong follower aspirations."

It also prompted us to wonder for the duration of 2017, and tongue-in-cheek, "if Bitcoin wasn't a secretive ploy by the BOJ - which has had a far more permissive approach to bitcoin cryptocurrencies than its central bank peers - to boost Japanese animal spirits, which had been squashed by three decades of chronic deflation and disenchantment with rigged equities."

Adding to the speculation, in his latest discussion of Bitcoin during the press conference following the Monetary Policy Meeting on 21 December, BOJ governor Haruhiko Kuroda once again refused to slam the cryptocurrency as fraud, as so many of his peers have done, and instead merely expressed an opinion that current Bitcoin market movements were the result of speculative trading. He also commented that price movements were abnormal, even if clearly beneficial as the below analysis reveals.

Fast forward to today, when Nomura analyst Yoshiyuki Suimon went the extra step of trying to quantify the actual profits, whether paper or realized, earned by Japan's Mr. Watanabe et al. This is what he found:

Figure 3 shows Bitcoin market cap and market cap divided by the weighting of yen-based trades. Assuming that the weighting of yen-based trades is equivalent to Bitcoin holdings by Japanese people, we estimate that Japanese people hold Bitcoin with a market cap of about ¥5.1trn. Assuming that the bulk of this ¥5.1trn belongs to Japanese investors, the scale of this increase in assets can hardly be ignored. According to a 27 December 2017 Nikkei article, the number of Japanese people holding Bitcoin has reached 1mn, and assuming average holdings of 3-4 Bitcoin per person, this is broadly consistent with our estimate. Meanwhile, the Bitcoin price rose by around ¥866,000 between Apr-Jun 2017 and Oct- Dec 2017, on which basis we estimate unrealized gains on Bitcoin held by Japanese people of roughly ¥3.2trn (3.7mn × ¥866,000).

This brings us to the next logical step, the one we have hinted repeatedly is what one or more central banks may well be after, namely the "wealth effect" generated by bitcoin appreciation, and the resultant boost to consumer spending, and therefore GDP, which a global cryptocurrency bubble would enable.

After all, central banks don't care if consumer spending rises as a result of higher stock prices, or higher bitcoin prices: at the end of the day, whatever boosts consumer confidence, works. Plus, as Citi pointed out last summer, everything is a bubble now, so may as well spread the wealth.... effect that is.

Here is Nomura's calculation of how much Japan's GDP may potentially rise as a result of bitcoin:

We consider the effect unrealized gains from this large-scale Bitcoin trading might have on the Japanese economy. Although Japanese investors' unrealized gains are unlikely to feed straight through to their patterns of consumption, it is common knowledge that personal consumption is bolstered as a result of increases in the value of asset holdings (ie, the wealth effect). According to earlier studies on the wealth effect in the context of the Japanese economy, an increase of ¥10bn in the value of assets bolsters personal consumption to the tune of around ¥0.2-0.4bn (a range that excludes the lower and upper limits obtained in the earlier studies shown in Figure 6). Although it is difficult to generalize about the patterns of spending of a person whose assets have soared in value as a result of the sharp rise in the price of Bitcoin, if we calculate the wealth effect assuming that an increase of ¥10bn in the value of assets bolsters personal consumption by ¥0.3bn, as in the earlier studies, then the aforementioned rise of around ¥3.2trn in the value of assets is likely to generate an increase of around ¥96.0bn in personal consumption by our estimate. Given that Japan's real GDP is around ¥522trn (2016 calendar year-basis), the y-y boost to GDP from this spending per se works out at just 0.07ppt. That said, given that the sharp rise in the price of Bitcoin occurred mainly in 2017 Q4, if that same wealth effect is replicated in 2018 Q1, we estimate it would boost annualized q-q real GDP growth by around 0.3ppt (= ¥96.0bn / quarterly GDP of ¥130trn x 4), which on a quarterly basis

represents an impact on a scale that cannot be ignored (Figure 5).

Yet while higher asset prices always result in greater consumer confidence, there is one notable difference between the wealth effect impact resulting from an increase in asset value caused by a rise in the price of Bitcoin, and an increase in asset value resulting from simply share price gains. Particularly in the case of Bitcoin, the high level of price volatility means that the formation of expectations vis-a-vis future asset value will doubtless be unstable compared with share prices and other financial assets on which the earlier studies were based. This is why as part of its analysis, Nomura shows the discounted wealth effect of Bitcoin transactions based on the volatility of both Nikkei 225 share prices and the price of Bitcoin (fig 5 above).

While it is unclear to what extent major Bitcoin holders who have increased their assets through the end of the year will bolster consumer spending through the beginning of year remains, Nomura is confident that there is a distinct possibility that spending, and thus GDP, will exceed expectations as a result of this factor.

And from there, we go to the final unknown: how long before rising bitcoin prices, and associated wealth effect, become part of the institutionalized calculation of GDP, and how long before the BOJ feels compelled to step in and bailout bitcoin investors should a major crash send the cryptocurrency crashing. Because remember: the wealth effect works both ways, and what may boost Japan's (and South Korean, and US, and so on) GDP today, will lead to an equal, or greater, decline tomorrow when the drop eventually happens.

Are central banks ready for it?