Bitcoin traders are generally focused on the U.S. Federal Reserve (Fed). However, the Bank of Japan (BoJ) could also be just as important for the cryptocurrency market.
The reason for this is Japan's unique role in global liquidity. When that liquidity tightens, Bitcoin often drops sharply.
Cheap Yen, Bitcoin’s Hidden Liquidity Engine
Japan has maintained near-zero or negative interest rates for decades. This has made the yen one of the cheapest currencies to borrow in the world.
This has created an opportunity to invest in assets that provide higher returns by borrowing in low-interest yen, known as 'yen carry trade.'
Large institutions — including hedge funds, banks, asset managers, and proprietary trading desks — are borrowing yen through Japanese banks, the FX swap market, and short-term funding channels.
Later, they convert that yen into dollars or euros. Capital is directed towards assets that offer higher returns.
These assets include stocks, bonds, emerging market products, and increasingly cryptocurrencies in recent years. Bitcoin benefits positively as this funding remains cheap and abundant.
Bitcoin is especially attractive because it trades 24/7 and has high volatility. For leveraged funds, it becomes a practical way to quickly and liquidly demonstrate risk appetite.
The BoJ's rate hike disrupts this order.
Why Could a Small Rate Hike by the BoJ Have a Big Impact?
On paper, the BoJ's anticipated move does not seem very large.
A rise of about 25 basis points is anticipated in the markets, and Japan's policy rate is expected to approach 0.75%. Still, this rate is significantly below those in the US or Europe.
But the main issue is not the magnitude of the increase.
Japan has anchored itself to zero for decades. Even a small increase signifies a structural change in funding conditions.
More importantly, expectations are changing.
If markets believe that Japan has entered a multi-step tightening cycle, traders do not wait. They reduce positions in advance.
Such an expectation alone could lead to selling across all global risky assets. Bitcoin, being continuously traded, feels this impact faster than stocks or bonds.
How Can BoJ Tightening Trigger Bitcoin Liquidation?
The sharpest declines in Bitcoin are mostly not due to instant sales, but rather from leverage.
A hawkish BoJ move is strengthening the yen and increasing global bond yields. This is putting pressure on risky assets.
At this point, Bitcoin is dipping below significant technical levels because the cryptocurrency market is largely based on perpetual contracts and margin.
As the price declines, leveraged long positions are reaching liquidation levels. In the cryptocurrency exchange, collateral is automatically sold to cover losses from positions exiting.
Forced sales are dragging Bitcoin down. This leads to a chain of liquidations.
This is why macro developments can sometimes seem like collapses specific to the cryptocurrency market. The initial shock comes from interest and currency movements.
The second wave comes from the leveraged structure existing in the crypto market.
What Are Traders Paying Attention to in BoJ Decisions?
The BoJ risk begins to accumulate before the announcement. Traders closely monitor the following early warning signals:
Its new strengthening indicates that carry trade operations are starting to close.
The rise in bond yields is leading to a tightening of financial conditions.
A decline in funding rates or open positions indicates that leveraged positions are being closed.
The break of critical supports for Bitcoin carries the risk of triggering liquidations.
The tone of BoJ guidance is also important. If a dovish message is given alongside a rate hike, it could calm the markets.
A hawkish statement could extend the selling pressure.
In short, the Bank of Japan is critical because it controls one of the main sources of global liquidity. When that tap is tightened, Bitcoin is primarily affected.
