With expectations of a Japanese interest rate hike rising, will Bitcoin experience a sharp drop?

summary

Recent market expectations of a Japanese interest rate hike have intensified, making the strengthening of the yen, changes in global liquidity, and volatility in the crypto market new focal points of discussion. Over the past decade, Japan has transitioned from extremely loose monetary policy to gradual normalization, with each policy turning point accompanied by a reallocation of global funds. A higher yen not only signifies a contraction in carry trades but also indicates potential short-term volatility, liquidity rebalancing, and a temporary pullback in risk appetite in the crypto market. Simultaneously, the crypto market is in a transitional phase of a new cycle, making it susceptible to amplified macroeconomic events and triggering emotional fluctuations. Yen policy is once again becoming part of the crypto narrative, with its impact manifesting primarily in changes in liquidity structure and risk appetite.

1. Background of the event and market reaction

In early December, the Bank of Japan's policy moves became the focus of global attention. After years of ultra-loose monetary policy, Bank of Japan Governor Kazuo Ueda publicly stated that the bank would "seriously assess whether to raise interest rates" at its December meeting. While this statement itself wasn't particularly aggressive, in the context of the Bank of Japan's long-term negative interest rates and cautious communication, it represented a potential policy shift. The market quickly adjusted its expectations: the probability of a rate hike jumped from about 30% to over 70%, the yen strengthened, and Japanese government bond yields rose significantly.

The reasons driving this policy shift are clear. Japanese prices have consistently exceeded the central bank's expectations, particularly with rising import costs for energy and food, making daily life increasingly price-pressured. Simultaneously, Japanese wages have been steadily rising, making the economy more resilient to moderate interest rate hikes than in the past. Coupled with continuous government stimulus measures and persistently high fiscal spending, unconventional policies such as "zero or even negative interest rates" are becoming increasingly inappropriate. This has led the market to widely believe that Japan's long-term era of quantitative easing may be coming to an end.

This policy signal quickly spread to global markets. The first to react were exchange rates and the bond market, with the yen appreciating and Japanese government bond yields rising. Subsequently, risk assets generally came under pressure: stock markets in the Asia-Pacific region and Europe and the United States successively declined. Among all assets, the cryptocurrency market reacted most sensitively, with major assets such as BTC and ETH experiencing short-term declines, volatility increasing, and market sentiment becoming more cautious in the short term.

Whether Japan raises interest rates is not only a matter of national economy, but also an important variable affecting global funding costs and liquidity expectations, with its impact being significantly amplified at the level of risk assets.

2. Macroeconomic Link: What kind of global repricing does the yen interest rate hike imply?

If Japan does raise interest rates in December, it will mark a significant turning point for the global macroeconomic system. The prolonged period of zero interest rates has made the yen the largest low-cost funding currency, with numerous institutions using it to allocate to high-yield assets globally, such as US Treasury bonds, technology stocks, emerging market assets, and crypto assets. A rate hike means this profit chain will face repricing pressure.

When the yen strengthens or financing costs rise, related carry trades must be unwinded. Funds will be withdrawn from overseas assets, first selling the most liquid assets (crypto assets are often among the top choices), and then converting them back into yen, resulting in a contraction in cross-border liquidity. At the same time, if Japanese government bond yields rise to a relatively attractive level, some funds may stop "flowing out to seek returns" and instead flow back to the domestic market, thereby suppressing the valuations of traditional assets such as US bonds, European bonds, and technology stocks.

Furthermore, this shift occurs against the backdrop of a rare divergence in global monetary policy: the market anticipates room for interest rate cuts by the Federal Reserve in 2025-2026, while Japan may raise rates in the opposite direction. This policy misalignment will inevitably exacerbate exchange rate volatility, compress carry trade opportunities, and amplify short-term fluctuations in global assets. As the asset class most sensitive to interest rate expectations and liquidity fluctuations, the crypto market is often the first to experience turbulence and react most violently. Japan's interest rate hike is not a regional event, but a systemic variable that could reshape global funding costs and asset pricing structures.

3. Historical Review: The "Resonance" Between Japanese Monetary Policy and the Crypto Market Cycle

Observing Japan's monetary policy over the past decade within the context of global liquidity and the crypto market cycle reveals an interesting structural resonance: although the bull and bear markets of the crypto market are not directly driven by the yen, their core theme has always revolved around global liquidity, and as an important source of global liquidity, Japan's policy tightening or loosening often becomes a potential cyclical signal for the crypto market.

During the era of ultra-loose monetary policy (2013–2021), the Japanese yen became a "hidden engine" for global risk assets. Starting in 2013, Japan implemented QQE (quantitative and qualitative easing, i.e., large-scale purchases of government bonds and risk assets, injecting funds into the market). Subsequently, in 2016, it further adopted negative interest rates and YCC (yield curve control, i.e., a policy framework that artificially fixes long-term interest rates at a low level). This combination directly prompted a large outflow of Japanese capital overseas in search of higher returns. This period coincided with two complete bull markets for Bitcoin , from hundreds of dollars to $60,000 (2013–2017, 2020–2021). It wasn't Japan alone that drove up Bitcoin prices; rather, the expansion of global capital and the prosperity of the yen arbitrage chain made highly volatile assets the most significant beneficiaries.

In 2022–2023, a combination of policy easing and risk events triggered a crypto bear market. During this period, Japan began easing its yield curve (YCC), causing a sharp depreciation of the yen. The Federal Reserve entered its fastest interest rate hike cycle in history, tightening global financing chains. Simultaneously, a credit crisis erupted within the crypto industry, with UST and FTX collapsing, pushing BTC and other mainstream assets into a deep bear market. While the initial trigger for the crypto decline was internal to the industry, macro-level liquidity tightening and unstable carry trade structures laid the foundation for the bear market.

In 2024, Japan officially exited negative interest rates and raised interest rates for the first time in 17 years, ushering in a new narrative phase for the crypto market. During this period, the global carry trade structure was repriced, and the crypto market exhibited a two-stage reaction of "short-term pressure and medium-term strength": in the short term, the contraction of funds led to multiple declines in risk appetite; in the medium to long term, macroeconomic uncertainties actually strengthened Bitcoin's "sovereign risk hedging" attribute. For example, during 2024–2025, multiple expectations of Japanese interest rate hikes were accompanied by: BTC short-term declines, followed by a rebound, even reaching new highs; remarkably similar to the period of Federal Reserve policy fluctuations in 2020.

A review of the evolution over the past decade reveals that the crypto market does not simply "follow the rise and fall of the yen," but is influenced by a combination of factors, including yen policy, the global interest rate environment, carry trade structures, and changes in funding costs. When the yen is loose, global carry trade funds expand, risk assets flourish, and crypto is more likely to experience a bull run; when the yen tightens, the funding chain contracts, carry trades are forced to unwind, and crypto is often the first to be impacted; and during periods of policy uncertainty and increased exchange rate volatility, Bitcoin's inherent safe-haven demand is amplified.

4. The potential impact of yen interest rate hikes on the cryptocurrency market

With Japan entering a phase of interest rate hike discussions, the question of "how yen fluctuations affect global liquidity" has become a market focus, and crypto assets are often the most sensitive and fastest-reacting sector in this macroeconomic shift.

Short-term shocks: Synchronized liquidity contraction and carry trade unwinding will primarily impact cryptocurrencies. If Japan raises interest rates or the yen strengthens significantly, global carry trades related to the yen will need to contract accordingly, forcing the liquidation of numerous positions that "borrow yen to buy risky assets." Due to the high liquidity and low rebalancing costs of crypto assets, they are often among the first categories to be liquidated. Even if the industry's fundamentals remain stable, the market may experience a period of correction. This short-term pressure primarily stems from external macroeconomic factors rather than issues within the industry itself.

Mid-term Rebalancing: Bitcoin's Hedging Properties Strengthen. Historically, whenever global macroeconomic uncertainty rises, exchange rates fluctuate significantly, or sovereign risks are reassessed, BTC's "supranational asset" status tends to become more prominent. Funds typically undergo deleveraging first, then flow back into highly liquid, globally transferable assets. Therefore, during policy transitions, Bitcoin often exhibits a two-stage trend of "first falling, then strengthening": the first stage is impacted, and the second stage is relatively stable or even strengthens.

Long-term structural changes: Domestic capital and regulatory reforms in Japan create new growth opportunities. The appreciation of the yen not only brings pressure but also reduces the cost for Japanese investors to allocate to dollar-denominated assets (including crypto assets). Coupled with recent improvements in Japanese Web3 regulation, tax reforms, and relaxed corporate holding policies, the participation of domestic institutions and compliant funds is continuously increasing. With the improved institutional environment, Japan has the potential to become a new source of crypto capital in Asia, bringing new growth.

Whether the Bank of Japan ultimately raises interest rates will have different impacts, but the direction will be similar: If a rate hike is formally implemented, global liquidity will be repriced, putting short-term pressure on the crypto market, but Bitcoin's macro hedging narrative may be further strengthened; if the rate hike is postponed, short-term risk appetite may rebound, but policy normalization will eventually arrive, and volatility will only be delayed. For crypto investors, the key is not to bet on a single outcome, but to identify structural opportunities amidst volatility, including the medium-term allocation value of BTC, the potential increase in Japanese domestic funds, and asset pricing changes under the restructuring of global liquidity.

5. Conclusion

A yen interest rate hike itself won't directly change the long-term direction of the crypto market, but it will alter the flow of funds, the structure of risk, and the way market sentiment fluctuates. With the macroeconomic and crypto cycles overlapping, every policy signal will be amplified and interpreted. For investors, understanding the transmission logic of this macroeconomic chain is more important than focusing on individual interest rate decisions. As Japanese monetary policy continues to normalize, the crypto market may be entering a new window of volatility.

refer to

1.Quantitative and Qualitative Monetary Easing: https://www.boj.or.jp/en/about/press/koen_2013/data/ko130412a1.pdf

2.New Framework for Strengthening Monetary Easing: "Quantitative and Qualitative Monetary Easing with Yield Curve Control": https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2016/k160921a.pdf

3.Bank of Japan scraps radical policy, makes first rate hike in 17 years: https://www.reuters.com/markets/asia/japan-poised-end-negative-rates-closing-era-radical-policy-2024-03-18

4.Bank of Japan makes surprise policy tweak: https://www.reuters.com/markets/asia/view-bank-japan-reviews-yield-curve-control-policy-2022-12-20

5.Bank of Japan ends era of negative interest rates: https://www.ft.com/content/67f51286-4e3f-465e-a780-2fe8ea0f4246

6.Bank of Japan's unconventional monetary easing brings global recognition as a bold, innovative practitioner: https://www.asiapathways-adbi.org/2023/06/bank-of-japans-unconventional-monetary-easing-brings-global-recognition-as-a-bold-innovative-practitioner

7.Japan's History of Crypto Asset Regulation: 2014-2020: https://www.sygna.io/blog/japan-crypto-regulation-history-2014-2020