Bitcoin traders often pay attention to the U.S. Federal Reserve. However, the Bank of Japan (BoJ) is at least as important for the crypto market.
This is because Japan plays a unique role in global liquidity. When that liquidity tightens, Bitcoin often drops significantly.
The 'cheap yen' is the hidden liquidity mechanism of Bitcoin
Japan has maintained near-zero or negative interest rates for decades. As a result, the yen has been one of the cheapest currencies in the world to borrow.
This led to the 'yen carry trade'.
Large institutions — such as hedge funds, banks, asset managers, and proprietary trading desks — borrow yen through Japanese banks, FX swap markets, and short-term financing.
After that, they convert yen into dollars or euros. This money flows into assets that yield more.
These assets include stocks, credit, emerging markets, and increasingly also crypto. Bitcoin benefits when this financing remains cheap and abundant.
Bitcoin is particularly attractive because it is traded 24/7 and is very volatile. For funds that use leverage, it is an easy way to take on risk.
A rate hike from the BoJ disrupts this system.
Why a small Bank of Japan percentage increase can have a large impact
On paper, the expected move from the BoJ seems modest.
The market expects an increase of about 25 basis points, which would raise Japan's interest rate to 0.75%. That still remains lower than in the US or Europe.
But the size of the increase is not the main point.
Japan has been around zero for decades. Even a small increase is already a structural change in financing conditions.
More importantly: it changes expectations.
If the market thinks Japan is starting multiple rate hikes, traders do not wait. They quickly reduce their risk.
Only that expectation can already lead to selling in risky assets worldwide. Bitcoin reacts quickly because it is always traded and moves faster than stocks or bonds.
How BoJ tightening can cause Bitcoin liquidations
The sharpest declines in Bitcoin rarely occur solely due to selling in the spot market. It is driven by leverage.
A strict step from the BoJ can strengthen the yen and raise global interest rates. This puts pressure on risk assets simultaneously.
Bitcoin then drops through important technical levels. This is significant because the crypto market relies heavily on perpetual futures and margin.
If the price drops, leveraged long positions reach their liquidation level. Exchanges automatically sell collateral to cover losses.
These forced sales push Bitcoin down even further. This creates more liquidations in a chain reaction.
Therefore, macroeconomic events can feel like a crypto crash. The first shock comes from interest rates and currencies.
The second wave arises from the leverage in the crypto market.
What traders are watching regarding Bank of Japan decisions
Risk around the BoJ is already building up before the announcement. Traders are watching for early signals:
Strong yen, which means that carry trades are being unwound
Rising bond yields, making financial conditions tighter
Decline in funding rate or open interest, indicating that leveraged positions are being unwound
Important Bitcoin supports are being breached, which can lead to more liquidations
The tone of the BoJ is also important. A rate hike with a cautious message can reassure the market.
A strict message actually leads to more selling panic.
In summary: the Bank of Japan is important because it manages a significant source of global liquidity. When that liquidity tightens, Bitcoin often takes the hits first.
