Japan Set to Hike Rates to 30-Year High, Posing Another Threat to BTC

The Bank of Japan (BoJ) is expected to raise interest rates for the first time since January, increasing the policy rate by 25 basis points to 0.75% from 0.50%, according to Nikkei. The decision, which is expected on Dec. 19, would take Japanese interest rates to their highest level in roughly 30 years.

The broader impact on global markets remains uncertain; however, developments in Japan have historically been bearish for bitcoin BTC$90,293.52 and the wider cryptocurrency market. A stronger yen has typically coincided with downside pressure on bitcoin, while a weaker yen has tended to support higher prices. Yen strength tightens global liquidity conditions, which bitcoin is particularly sensitive to.

The yen is currently trading near 156 against the U.S. dollar, slightly stronger than its late November peak just above 157.

The BoJ rate hike is said to have implications for the yen carry and could impact BTC via the equities channel.

For decades, hedge funds and trading desks have borrowed yen at ultra-low or even negative rates to finance positions in higher beta assets, mostly tech stocks and U.S. Treasury notes, a strategy enabled by Japan’s prolonged period of loose monetary policy.

The theory, therefore, is that a higher Japanese rate could dent the attractiveness of these carry trades and reverse the money flow, leading to broad-based risk aversion in stocks and cryptocurrencies.

These fears are not unfounded. The last BOJ hike, which lifted rates to 0.5% on July 31, 2024, led to the yen rally and massive risk aversion in early August that saw BTC slide from roughly $65,000 to $50,000.

This time could be different

The impending hike may not lead to risk-off for two reasons. First, speculators are already holding net long (bullish) exposure in the yen, which makes a snap reaction to the BoJ hike unlikely. In mid-2024, speculators were bearish on yen, according to CFTC data tracked by Investing.com.

Secondly, Japanese bond yields have risen throughout this year, hitting multi-decade highs at both the short and long ends of the curve. The upcoming rate hike, therefore, reflects official rates catching up with the market.

Meanwhile, this week, the U.S. Federal Reserve cut rates by 25 basis points to a three-year low on top of introducing liquidity measures. The dollar index has dropped to a seven-week low.

Taken together, these things suggest low odds of a pronounced “JPY carry unwind” and year-end risk aversion.

That said, Japan’s fiscal situation, with debt-to-GDP ratio of 240%, warrants close monitoring next year as a potential source of market volatility.

“Under PM Sanae Takaichi, a big fiscal expansion and tax cuts arrive while inflation hovers near 3% and the BoJ keeps rates too low, still acting as if Japan were stuck in deflation. With high debt and rising inflation expectations, investors question BoJ credibility, JGB yields steepen, the yen weakens, and Japan starts to look more like a fiscal crisis story than a safe haven,” MacroHive said in a market update.