Tomorrow's decision on interest rates by the Bank of Japan may become the most important turning point for the global financial market this year.
Tomorrow, the Bank of Japan will announce its interest rate decision. The market generally expects an interest rate hike probability as high as 80%-90%, which could raise the benchmark interest rate from 0.5% to 0.75%, setting a new high in nearly 30 years.
Like most people, I usually don’t pay special attention to the news, but this time the interest rate hike in Japan is completely different. It is far from ordinary market noise; it is a macro event of the same weight as the U.S. rate cuts, and it may even have a greater impact.
All news is the most important for the first and last time, and the volatility is the greatest. Looking back at the recent rate cuts by the Federal Reserve, the market's reaction has been increasingly muted. It is certain that if Japan really raises interest rates tomorrow, the market volatility triggered will far exceed the performance during the Fed's rate cuts last December.
01 Background and Expectations of Japan's Interest Rate Hike
This rate hike is not a sudden move, but a key step in the gradual normalization of Japan's monetary policy. The Bank of Japan ended its eight-year negative interest rate policy in March 2024, followed by two more rate hikes in July and January 2025.
Inflation data provides the Bank of Japan with reasons to raise interest rates. Japan's core CPI has risen year-on-year for 50 consecutive months, with an increase of 3.0% in October. At the same time, wage growth is also showing strong momentum, with this year's 'spring struggle' wage negotiations reaching the highest level in more than 30 years.
The remarks from Bank of Japan Governor Ueda Kazuo have been quite firm recently, as he clearly stated that he would 'seriously assess whether to raise interest rates' at the December meeting, which is very similar to his statements before the previous rate hike. The market has quickly adjusted expectations, with the probability of a rate hike soaring from 30% a few weeks ago to the current 80%-90%.
02 Yen Arbitrage: The Invisible Engine of the Global Market
To understand the global impact of Japan's interest rate hike, one must first understand the operational mechanism of yen arbitrage trading.
Due to Japan's long-standing near-zero interest rates, the yen has become one of the cheapest financing currencies globally. Investors borrow low-cost yen, convert it to dollars or other currencies, and then invest in high-yield assets like U.S. Treasuries, stocks, and cryptocurrencies.
The scale of this mechanism is shocking—conservatively estimated between $1-5 trillion, with some institutions even estimating as high as $20 trillion. In the cryptocurrency field, about $3.4 trillion of arbitrage trading is related to the yen.
Domestic Japanese funds have a relatively high participation rate in the cryptocurrency market. The number of accounts opened in Japanese cryptocurrency exchanges exceeds 12 million, with custodial fund balances exceeding 5 trillion yen (about $340 billion). About one-tenth of Japanese citizens hold cryptocurrencies, indicating a high market penetration rate.
03 Historical Lessons: Japan's Interest Rate Hike and Global Crisis Indicators
History does not simply repeat itself, but it often rhymes. Looking back over the past few decades, the Bank of Japan's policy shifts have often accompanied global crises.
In August 2000, the Bank of Japan raised interest rates to 0.25%. A few weeks later, the internet bubble burst, and the Nasdaq index began a more than two-year slump.
In 2006-2007, the Bank of Japan raised interest rates again. Shortly after, the Asian stock market crashed, Bear Stearns' hedge fund imploded, and the subprime crisis eventually evolved into a global financial crisis.
The rate hike in August 2024 also triggered a $600 billion evaporation of market value in the cryptocurrency market, with Bitcoin experiencing a single-day plunge.
This correlation is not coincidental. When Japan, the last global 'tap', begins to tighten, it often signifies a fundamental shift in the global liquidity environment.
04 The transmission mechanism of Japan's interest rate hike on cryptocurrency
Japan's interest rate hike will impact the cryptocurrency market through several key channels:
The most direct impact is the closure of arbitrage trades. After the rate hike, the cost of financing in yen will rise from around 0.1% to 0.75%, an increase of 7.5 times. Arbitrage trading is no longer 'costless', forcing investors to sell high-risk assets (including cryptocurrencies) to cover their yen positions.
Secondly, global liquidity is tightening. As the last major 'tap' globally, Japan's tightening policy signifies the complete end of the era of ultra-loose monetary policy. This will drain liquidity from the market, putting pressure on high-risk assets.
In addition, market sentiment and leverage liquidation can also amplify volatility. The current fear and greed index in the cryptocurrency market is in the 'extreme fear' zone, and the market leverage ratio is at historical highs. Once prices start to fall, it could trigger a forced liquidation wave of $5-10 billion.
05 Personal Views and Market Outlook
In my view, this rate hike may trigger more severe fluctuations than the market expects. There are several points that are often overlooked:
Firstly, the power of policy misalignment has been underestimated. The U.S. cuts rates while Japan raises rates; this opposing policy path will exacerbate exchange rate fluctuations and further compress arbitrage space. Although the Fed's rate cut theoretically favors risk assets, the liquidity contraction caused by Japan's rate hike may dominate in the short term.
Secondly, the market structure is weaker than many imagine. At the beginning of 2025, Wall Street set a year-end target price for Bitcoin above $150,000, but the reality is that the market continued to decline after peaking in October. This 'collective failure' shows that when good news runs out and leverage is high, the market is prone to severe fluctuations due to macro news.
From a technical analysis perspective, Bitcoin faces significant resistance in the $92,975-$94,000 range. The key support level is between $88,000-$90,000, especially the $89,000 line is seen as a boundary for short-term strength and weakness. If this support level is broken, the market may experience panic selling.
I am not pessimistic about the medium- to long-term trends. Historical data shows that after Japan raises interest rates, the cryptocurrency market often exhibits characteristics of 'short-term decline, medium-term strength'. During the policy transition phase, Bitcoin's 'super-sovereign asset' attribute may become prominent, and its macro-hedging value may be re-recognized by the market.
The market always swings between panic and greed. Tomorrow's Bank of Japan decision undoubtedly adds a heavy weight to one side of the scale. Some see risk, while others see opportunity—a chance to seek value amid panic.
The wind is indeed changing; those ships overly reliant on leverage may need to dock and seek shelter. For long-term investors, each significant market correction may provide a better entry point.
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