Bitcoin and global markets are on high alert for a possible shockwave, as it is expected that the Bank of Japan (BOJ) will increase its benchmark interest rate next week. This movement, which has not occurred since January, has a 90% probability according to a recent survey and could trigger significant declines in risk assets.
This anticipated policy change could undo the popular investment strategy known as 'yen carry trade', generating strong selling pressure on cryptocurrencies and stocks. Historically, interest rate hikes by the Japanese central bank have caused sharp but temporary corrections in the price of bitcoin.
The unwinding of the yen carry trade
For decades, Japan's near-zero interest rates allowed investors to borrow yen at low cost to invest in higher-yielding assets, including Bitcoin. This strategy, the 'Yen carry trade,' has channeled trillions of dollars into global markets. However, the Bank of Japan is now about to tighten its monetary policy.
The vast majority of economists predict that the BOJ will raise its short-term rate by 25 basis points to 0.75%. A Reuters survey of 70 economists showed that 63 of them expect the increase, a significant rise from the 53% in the previous month’s survey.
This growing consensus signals a significant policy shift, driven by concerns about inflation and the persistent weakness of the yen. When the BOJ raises rates, borrowing yen becomes more expensive. As a result, the profitability of the 'carry trade' decreases, leading investors to sell their assets to pay off their loans.
This deleveraging process could lead to a significant outflow of capital from risk assets like cryptocurrencies, putting downward pressure on prices.
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A pattern of declines in the price of Bitcoin
The market has seen this pattern repeat several times over the past two years. Previous rate increases by the Bank of Japan have been followed by immediate and substantial corrections in the price of Bitcoin. This historical precedent has traders on edge before the announcement on December 19.
“We have seen this pattern three times in this BTC cycle. Each time Japan raised the rate, #BTC fell sharply: March 2024: -10% in one day. August 2024: -24% in five days. January 2025: -12% in ten days,” explained @techconcatalina in a post on X.
This recurring event is not described as an unexpected 'black swan,' but rather as a 'gray swan': a known risk that is often overlooked. Although these rate increases have not ended the long-term Bitcoin bull market, they have created significant obstacles in its path.
In the last few hours, Bitcoin experienced a sharp pullback from $94,177 to $89,623. However, it has slightly recovered to trade at $90,057, accumulating an intraday drop of 3%, according to CoinGecko data.
The measure expected from the BOJ is part of a broader strategy to stabilize Japan's economy. According to a Reuters report, Prime Minister Sanae Takaichi's government is willing to tolerate monetary tightening to combat inflation risks and yen weakness.
Meanwhile, the yield on the ten-year Japanese government bond recently reached an 18-year high, reflecting the pressure from new public debt issuance.
The impact could also extend to U.S. markets. As Japanese bonds become more attractive with higher yields, Japanese investors—who are the largest foreign holders of U.S. debt—could sell their U.S. bonds.
This action would raise U.S. bond yields, making them more attractive relative to stocks and cryptocurrencies, which would add additional selling pressure.
This suggests a continued tightening cycle, meaning that the pressure from unwinding the 'Yen carry trade' could remain a recurring theme for Bitcoin and global markets over the next year.
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