The Bank of Japan's rate hike countdown: Will the crypto market repeat the downward trend?

Since 2024, every interest rate hike by the Bank of Japan has been accompanied by a more than 20% drop in Bitcoin prices. As the December policy meeting approaches, market expectations of a rate hike have reached 98%, and unwinding yen carry trades could trigger a global liquidity crunch, posing another test for the crypto market.
(Background: The Bank of Japan hints “Possible rate hike in December”: Is the yen ending its bottoming out and preparing to rebound?)
(Additional context: Japanese government bond auctions “sell out instantly,” yields slightly decline, and the market is confident that rates will rise by the end of the year.)

Since 2024, every rate hike by the Bank of Japan has been accompanied by a more than 20% decline in Bitcoin prices. After the Federal Reserve’s 25 basis point rate cut was finalized, another major macro event warrants attention. The Bank of Japan (BOJ) is scheduled to hold its policy meeting on December 18-19, with market expectations for a rate hike at its peak.

According to the latest data from the prediction market platform Polymarket, there is a 98% probability that the BOJ will raise the benchmark interest rate by 25 basis points at this meeting, while the chance of keeping it unchanged is only 2%. The probabilities for a rate cut or a larger increase are both less than 1%. This data aligns with a Reuters poll, which shows 90% of economists (out of 70, with 63) expect the BOJ to raise short-term interest rates from the current 0.5% to 0.75%.

These indicators reflect a market consensus on Japan’s economic recovery and inflation pressures: Japan’s core CPI in November rose 2.5% year-over-year, well above the BOJ’s 2% target, and the USD/JPY exchange rate has recently hovered around 150, prompting the central bank to take action to curb further yen depreciation.

Since 2024, Japan has raised interest rates three times. In March 2024, the BOJ ended its negative interest rate policy for the first time, raising rates from -0.1% to 0-0.1%, marking the end of Japan’s 17-year ultra-loose monetary era. In July 2024, the BOJ further increased rates to 0.25%, causing intense volatility in global stock and crypto markets. In January 2025, rates rose to 0.5%, also putting pressure on risk assets. Currently, market pricing indicates that this rate hike is almost certain, but its potential impact extends beyond Japan, affecting global liquidity through complex transmission mechanisms, especially in the cryptocurrency market.

BOJ rate hikes and their transmission to global markets

The reason Japan’s monetary policy can influence global markets mainly stems from the massive scale of the “yen carry trade” (yen carry trade). This strategy involves investors borrowing low-interest yen to invest in high-yield assets such as U.S. Treasuries, stocks, or cryptocurrencies. According to data from the Bank for International Settlements (BIS), the global yen carry trade exceeds $1 trillion, with some funds flowing directly into crypto markets. When the BOJ raises rates, borrowing costs for yen increase, leading to yen appreciation (USD/JPY exchange rate declines). Investors are forced to unwind carry positions, selling high-risk assets to repay yen-denominated debt. This can trigger a global liquidity tightening, similar to “reverse quantitative easing.”

Historically, this mechanism has amplified market volatility multiple times. After the July 2024 rate hike, the yen appreciated from 160 to below 140 against the dollar, triggering a multi-trillion-dollar sell-off of global assets. Crypto markets bore the brunt: Bitcoin plummeted from a high of $65,000 to $50,000, a 26% drop; the entire crypto market lost $600 billion in market cap. These events are not isolated but are chain reactions caused by yen appreciation: capital exits carry trades, pushing the VIX (fear index) higher and magnifying leverage liquidations.

In the current environment, this impact could be even more complex. Although the Federal Reserve (Fed) has cut rates three times in 2025, lowering the federal funds rate to 4.25%-4.5% and providing global liquidity support, the BOJ’s reverse tightening could offset some of these effects. Japan’s 10-year government bond yield has risen to 1.95%, well above the expected policy rate, indicating markets have already priced in rate hikes. However, if the yen further appreciates below 140, global risk assets may face re-pricing.

Bitcoin, as a high-beta asset, is highly sensitive to liquidity changes. In 2025, Bitcoin’s price has fallen from a high of $120,000 to around $90,000, often the first to be sold off during liquidity crunches.

Negentropic, co-founder of Glassnode, posted: “The market is not afraid of tightening (rate hikes), but of uncertainty. The BOJ’s policy normalization brings clear expectations to the global financing environment, even if leverage is under pressure in the short term. Yen carry trades have significantly contracted, and volatility signals opportunities. Bitcoin tends to strengthen after policy pressures are released, not before. Reduced chaos, stronger signals. This looks like preparing for asymmetric upside risks.”

Analyst AndrewBTC, based on historical data, notes that every rate hike by the Bank of Japan since 2024 has been accompanied by Bitcoin dropping over 20%, such as approximately 23% in March 2024, about 26% in July 2024, and around 31% in January 2025. If the BOJ raises rates again next week, similar downside risks may re-emerge.

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