This Friday, the Bank of Japan is highly likely to make a major decision—raising the policy interest rate from 0.5% to 0.75%, hitting a new high since 1995. Behind the seemingly calm decision, there could be a wave of turbulence sweeping through global capital markets.

Why did the Bank of Japan suddenly change its "Zen" stance? The logic behind it is actually quite clear. First, inflationary pressures have become unbearable. Core CPI has exceeded the 2% target for three consecutive years, with inflation permeating every corner of Japanese residents' lives, from supermarket vegetable prices to household electricity bills. Second, there is good news from wages. In the spring 2025 labor negotiations, wage increases reached 5.42%, a rare growth in decades. When the amount of cash in hand increases, inflation expectations become more stubborn. The third factor is the yen's decline. Continuous currency depreciation has increased the cost of imports, further intensifying domestic price pressures.

But what truly warrants attention is not these surface reasons, but how Japan's rate hike will reshape global capital flows. Over the past decade or so, a nearly perfect "arbitrage game" has been played out worldwide—investors borrow yen at almost zero cost, then exchange it for US dollars to buy high-yield assets like US stocks and bonds. This reverse arbitrage exists because the Bank of Japan has maintained ultra-low interest rates.

Now, the game has changed. With Japan's rate hike, the cost of borrowing yen rises rapidly, making previously easy arbitrage trades no longer feasible. What does this mean? Trillions of dollars of global funds will need to perform reverse operations—selling off overseas assets and converting back to yen to repay loans. This is a massive liquidity drain.

How will the chain reaction unfold? First, it will hit the US stock and bond markets, because Japan is the largest foreign holder of US Treasuries. Once the willingness to reduce holdings increases, selling pressure will be significant. Second, emerging markets will become more vulnerable—whether it's India or Indonesia, their stock markets and currencies are likely to become targets for capital withdrawal. As high-risk assets, cryptocurrencies will see further amplified volatility. In fact, the market's anticipation of the Bank of Japan's rate hike has already been reflected in Bitcoin's recent short-term fluctuations.

The tightening of global liquidity has just begun, and subsequent impacts will be gradually released. For any participant in the global capital markets, this is a moment that warrants extra caution.