CoinW Research Institute
Abstract
Recently, the market's expectations for interest rate hikes in Japan have intensified, making "the strengthening of the yen, changes in global liquidity, and volatility in the cryptocurrency market" the new focal point of discussion. Over the past decade, Japan has gradually moved from extreme monetary easing towards normalization, with each policy turning point accompanied by a reallocation of global funds. The rise in yen interest rates not only signifies a contraction in arbitrage trading but also indicates that the cryptocurrency market may experience short-term volatility, liquidity rebalancing, and periodic adjustments in risk appetite. At the same time, the cryptocurrency market is in a transitional phase of a new cycle, where macro events can easily be amplified by the market, triggering emotional fluctuations. Japanese monetary policy is once again becoming part of the cryptocurrency narrative, with its impact more reflected in "liquidity structure" and "changes in risk appetite."
1. Background of the Event and Market Response
At the beginning of December, the policy direction of the Bank of Japan became the center of global attention. After years of ultra-easy monetary policy, Bank of Japan Governor Kazuo Ueda publicly stated that he would "seriously assess whether to raise interest rates" at the December meeting. This statement itself is not aggressive, but in the context of the long-standing negative interest rates and cautious communication from the Bank of Japan, it represents a potential policy turning point. The market quickly adjusted its expectations: the probability of a rate hike surged from about 30% to over 70%, the yen strengthened, and Japanese government bond yields rose significantly.
The reasons behind the policy shift are clear. Japan's prices have consistently exceeded the central bank's expectations, particularly with rising import costs for energy and food, leading to increasingly evident price pressures in daily life. At the same time, Japanese wages have been steadily rising, and the economy is more capable of withstanding moderate interest rate hikes than in the past. Coupled with the government's continuous stimulus policies and long-term increases in fiscal spending, the unconventional policies of "zero interest rates or even negative rates" are becoming increasingly inappropriate. This has led the market to generally believe that Japan's long era of monetary easing may be coming to an end.
This policy signal quickly transmitted to global markets. The first reactions were seen in the currency and bond markets, with the yen appreciating and Japanese government bond yields rising. Subsequently, risk assets came under pressure: stock markets in the Asia-Pacific region and Europe and the United States were successively adjusted downwards. Among all assets, the cryptocurrency market reacted most sensitively, with major assets like BTC and ETH experiencing short-term declines, increased volatility, and a cautious market sentiment in the short term.
Whether Japan raises interest rates is not only related to the economy of one country but is also an important variable affecting global funding costs and liquidity expectations, with the reactions in risk assets being significantly amplified.
2. Macro Link: What Does a Yen Rate Hike Mean for Global Repricing?
If Japan indeed raises interest rates in December, it will constitute an important turning point in the global macro system. The long-standing zero interest rates have made the yen the largest low-cost financing currency, with many institutions borrowing yen to allocate to high-yield global assets such as U.S. Treasuries, tech stocks, emerging market assets, and cryptocurrency assets. A rate hike means that this arbitrage chain will face repricing pressure.
When the yen strengthens or financing costs rise, related carry trades must be forced to unwind. Funds will be withdrawn from overseas assets, first selling the most liquid assets (cryptocurrency assets often rank at the top), and then converting back to yen, resulting in a contraction of cross-border liquidity. Meanwhile, if Japanese government bond yields rise to a relatively attractive level, some funds may stop "flowing out in search of yield" and instead return domestically, thereby suppressing the valuations of traditional assets such as U.S. Treasuries, European bonds, and tech stocks.
Moreover, this change occurs against the backdrop of rare divergence in global monetary policy: the market expects the Federal Reserve to have room for rate cuts 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. The cryptocurrency market, being the asset class most sensitive to interest rate expectations and liquidity fluctuations, often experiences the earliest and most intense shocks. A Japanese 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 Relationship" Between Japanese Monetary Policy and Cryptocurrency Market Cycles
Observing Japan's monetary policy over the past decade within the context of global liquidity and the cryptocurrency market cycles reveals an interesting structural resonance: although the bull and bear markets in the cryptocurrency market are not directly driven by the yen, their core narrative has always revolved around global liquidity. As a significant source of global liquidity, changes in Japan's policy stance often serve as potential cyclical signals for the cryptocurrency market.
Ultra-easy era (2013–2021), the yen became the "implicit engine" of global risk assets. Starting in 2013, Japan implemented QQE (Quantitative and Qualitative Easing, which involves large-scale purchases of government bonds and risk assets, injecting funds into the market), and further adopted negative interest rates and YCC (Yield Curve Control, a policy framework that artificially fixes long-term interest rates at low levels) in 2016. This combination directly prompted a significant outflow of Japanese capital seeking higher yields overseas. This period coincided with two complete bull markets for Bitcoin, rising from hundreds of dollars to $60,000 (2013–2017, 2020–2021). It was not Japan alone that pushed up Bitcoin, but rather the expansion of global funds and the prosperity of the yen arbitrage chain that benefited high-volatility assets the most.
2022–2023, policy loosening combined with risk events triggered a cryptocurrency bear market. In 2022–2023, Japan began to loosen YCC, the yen depreciated sharply, and the Federal Reserve entered the fastest rate hike cycle in history, tightening global financing chains. At the same time, a credit crisis erupted within the cryptocurrency industry, with UST and FTX collapsing one after another, leading BTC and mainstream assets into a deep bear market. Although the trigger for the decline in cryptocurrency prices came from within the industry, the tightening of macro-level liquidity and the instability of the carry trade structure laid the groundwork for the bearish trend.
In 2024, Japan officially exits negative interest rates and raises rates for the first time in 17 years, while the cryptocurrency market enters a new narrative phase. During this period, the global carry trade structure is repriced, and the cryptocurrency market exhibits a two-phase response of "short-term pressure, mid-term strength": in the short term, liquidity contraction leads to multiple declines in risk appetite; in the medium to long term, macro uncertainty actually reinforces Bitcoin's "sovereign risk hedge" attribute. For example, during the 2024–2025 period, multiple expectations of Japanese rate hikes were accompanied by: BTC experiencing short-term declines, followed by a resurgence, even reaching new phase highs; this is very similar to the period of Federal Reserve policy fluctuations in 2020.
From the evolution over the past decade, it can be seen that the cryptocurrency market does not simply "follow the yen's rise and fall," 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 arbitrage funds expand, risk assets thrive, and cryptocurrencies are more likely to enter a bull market; when the yen tightens, the financing chain contracts, carry trades are forced to unwind, and cryptocurrencies often bear the brunt of the impact; during phases of unclear policy direction and increased exchange rate volatility, the demand for Bitcoin as a safe haven is often amplified.
4. Potential Impact of Yen Rate Hikes on the Cryptocurrency Market
Japan's entry into the discussion of interest rate hikes has made "how yen fluctuations affect global liquidity" a market focus, and cryptocurrency assets are often the most sensitive and responsive sector to this macro change.
Short-term impact: liquidity contraction synchronously, carry trades unwinding prioritize cryptocurrencies. If Japan raises interest rates or the yen significantly strengthens, global carry trades related to the yen will need to contract synchronously, and many positions of "borrowing yen to buy risk assets" will be forced to unwind. Due to the high liquidity and low repositioning costs of cryptocurrency assets, they often become the first category to be reduced, even if the industry's fundamentals remain stable, the market may still experience a temporary pullback. This short-term pressure mainly comes from external macro chains rather than issues within the industry itself.
Mid-term rebalancing: Bitcoin's hedging attribute strengthens. Historically, whenever global macro uncertainty rises, exchange rates experience significant fluctuations, or sovereign risks are reassessed, BTC's positioning as a "super-sovereign asset" often becomes more prominent. Funds typically first undergo deleveraging and then flow back into high liquidity, globally transferable assets. Therefore, during policy turning points, Bitcoin often exhibits a "first decline, then strength" dual-phase trend: the first phase is impacted, while the second phase stabilizes or even strengthens.
Long-term structural changes: domestic Japanese funds and regulatory reforms bring incremental space. The appreciation of the yen not only brings pressure but also reduces the cost for Japanese investors to allocate to dollar-denominated assets (including cryptocurrency assets). Coupled with Japan's recent regulatory optimizations in Web3, tax reforms, and relaxed corporate holding policies, the participation of domestic institutions and compliant funds is continuously increasing. With improvements in the institutional environment, Japan has the potential to become a new source of cryptocurrency funding in Asia, bringing new increments.
As for whether the Bank of Japan will ultimately raise interest rates, the rhythm of impact may differ, but the direction is similar: if a formal rate hike occurs, global liquidity will face repricing, the cryptocurrency market may experience short-term pressure, but the macro hedging narrative for Bitcoin may be further strengthened; if the rate hike is postponed, short-term risk appetite may rebound, but normalization of policy will eventually come, and volatility will only be delayed. For cryptocurrency investors, the key is not to bet on a single outcome but to identify structural opportunities amid volatility, including the mid-term allocation value of BTC, the potential increments from domestic Japanese funds, and changes in asset pricing under the reconstruction of global liquidity.
5. Conclusion
A yen rate hike itself will not directly change the long-term direction of the cryptocurrency market, but it will alter the rhythm of funds, the structure of risks, and the way market sentiment fluctuates. In the current overlap of macro and cryptocurrency cycles, every policy signal will be amplified in interpretation. For investors, understanding the transmission logic of this macro chain is more important than fixating on a single interest rate decision. As Japan's monetary policy continues to return to normalization, the cryptocurrency market may welcome a new window of volatility.
References
- 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
- Japan’s History of Crypto Asset Regulation: 2014-2020: https://www.sygna.io/blog/japan-crypto-regulation-history-2014-2020
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