Original Title: "US-Japan Policy 'Contradiction': Japan's Rate Hike of 80% Lands, Has Global Market Money Flow Changed?"

Original Author: Xiu Hu, Crypto KOL

The global financial market in December has been pushed to the forefront by three "monetary policy dramas"—in addition to the Federal Reserve's interest rate cut expectations being at an all-time high (the market bets on a high probability of a 25 basis point cut in December), the Bank of Japan's "hawkish tone" (Bank of America warns of a rate hike to 0.75% in December, the highest since 1995), there is another key change that many have overlooked: the Federal Reserve officially stopped its balance sheet reduction on December 1, marking the end of a three-year quantitative tightening phase.

The combination of "rate cuts + halt in balance sheet reduction" and "rate hikes" has completely rewritten the global liquidity landscape: the Federal Reserve is stopping the "bloodletting" while preparing to "release water," and the Bank of Japan is tightening its "money bag" accordingly. In this balance of loosening and tightening, the $5 trillion yen carry trade faces a reversal, the global interest rate spread is being restructured rapidly, and the pricing logic of US stocks, cryptocurrencies, and US Treasuries may be completely rewritten. Today, we will dissect the impact logic of this situation, understand where the money will flow, and where the risks lie.

Key Point: Japan's rate hike is not a "sudden attack," the 80% probability hides these signals

Compared to "will they hike," the market is now more concerned with "how they will hike and what will happen after." According to informed sources, Bank of Japan officials are prepared for a rate hike at the policy meeting ending on December 19, provided that the economy and financial markets are not significantly impacted. Data from the US prediction platform Polymarket shows that the current market bets on the Bank of Japan raising rates by 25 basis points in December have surged from 50% to 85%, essentially locking in a "high probability event."

The core background for this rate hike has two aspects:

First, domestic inflation pressure is hard to alleviate. The core CPI in Tokyo rose by 3% year-on-year in November, remaining above the 2% target for 43 consecutive months, and the depreciation of the yen has further pushed up the prices of imported goods;

Second, there are economic support points. This year, Japanese companies have averaged salary increases of over 5%, a level of increase not seen in decades, which gives the central bank confidence in the economy's ability to withstand rate hikes. More crucially, Bank of Japan Governor Kazuo Ueda had already released clear signals on December 1, and this "advance preview" is part of the policy itself—serving as a precautionary measure to avoid a repeat of last August's "unexpected rate hike triggering a global stock market crash."

Core Impact: The Game of Policy Timing, Funding Flows Hide Key Answers

1. Policy Sequence Breakdown: The Underlying Logic of the Federal Reserve "Loosening First," Bank of Japan "Tightening Later"

From a timeline perspective, the Federal Reserve is likely to cut rates by 25 basis points at the December meeting first, while the Bank of Japan plans to follow up with a rate hike at the meeting on December 19. This "loosen first, tighten later" policy combination is not accidental but a rational choice based on each party's economic demands, hiding two layers of core logic:

For the Federal Reserve, the combination of "halt in balance sheet reduction, then rate cut" is a "dual defense" against slowing economic growth. From a policy rhythm perspective, stopping the balance sheet reduction on December 1 is the first step—this action ends the quantitative tightening process that began in 2022. As of November, the Federal Reserve's balance sheet has shrunk from a peak of $9 trillion to $6.6 trillion, still $2.5 trillion higher than pre-pandemic levels. Stopping the "bloodletting" aims to alleviate liquidity tension in the money market and avoid interest rate fluctuations caused by insufficient bank reserves. On this basis, a rate cut is the second step of "active stimulation": the US ISM manufacturing PMI fell to 47.8 in November, remaining below the growth line for three consecutive months, and although core PCE inflation has dropped to 2.8%, the consumer confidence index fell by 2.7 percentage points month-on-month, coupled with the interest pressure from $38 trillion in federal debt, the Federal Reserve needs to lower financing costs and stabilize economic expectations through rate cuts. Choosing to "act first" allows them to seize policy initiative and reserve space for potential economic fluctuations.

For the Bank of Japan, "delayed rate hikes" are an "offensive adjustment" to avoid risks. Analyst Zhang Ze'en from Western Securities points out that the Bank of Japan deliberately chose to raise rates after the Federal Reserve's rate cut, which can help reduce the impact of its own rate hike on the domestic economy by taking advantage of the window of dollar liquidity easing; on the other hand, the Federal Reserve's rate cut leads to a decline in US Treasury yields, and a rate hike in Japan can quickly narrow the US-Japan interest rate spread, enhancing the attractiveness of yen assets and accelerating the return of overseas funds. This "leveraging the situation" operation gives Japan more initiative in the process of normalizing its monetary policy.

2. Funding Absorption Suspicion: Is Japan's Rate Hike a "Natural Reservoir" for the Federal Reserve's Rate Cut?

Based on US M2 data and funding flow characteristics, the likelihood of Japan's rate hike absorbing the Federal Reserve's released funds is extremely high, based on three key facts:

First, the US M2 and policy combination reveal a "dual increment" in liquidity. As of November 2025, the US M2 money supply is $22.3 trillion, an increase of $0.13 trillion from October, with the year-on-year growth rate of M2 rising to 1.4%—this rebound has already shown the impact of stopping the balance sheet reduction. The dual policy overlay will further amplify the liquidity scale: stopping the balance sheet reduction means a monthly reduction of about $95 billion in liquidity recovery, and a 25 basis point rate cut is expected to release $550 billion in new funds. Under this resonance, the US market will welcome a "liquidity dividend window" in December. However, the problem is that domestic investment returns in the US continue to decline, with the average ROE (return on equity) of S&P 500 constituents dropping from 21% last year to 18.7%, and a large amount of incremental funds urgently need to find new yield outlets.

Second, Japan's rate hike creates a "yield gap effect." With Japan's rate hike to 0.75%, the yield on 10-year Japanese government bonds has risen to 1.910%, narrowing the spread with the US 10-year Treasury yield (currently 3.72%) to 1.81 percentage points, the lowest level since 2015. For global capital, the yield attractiveness of yen assets has significantly increased, especially since Japan is the world's largest net creditor, with domestic investors holding $1.189 trillion in US Treasuries. As domestic asset yields rise, this portion of funds is accelerating its return, with Japan net selling US Treasuries amounting to $12.7 billion in November alone.

Finally, the reversal of carry trades and the liquidity increment form a "precise reception." Over the past two decades, the scale of the "borrowing yen to buy US Treasuries" carry trade has exceeded $5 trillion, and the liquidity increment brought by the Federal Reserve's "halt in balance sheet reduction + rate cut," combined with the yield attractiveness of Japan's rate hike, will completely reverse this trading logic. Capital Economics estimates that if the US-Japan interest rate spread narrows to 1.5 percentage points, it will trigger the unwinding of at least $1.2 trillion in carry trades, with about $600 billion of funds returning to Japan—this scale can not only absorb the $550 billion released by the rate cut but also take in some of the liquidity left over from stopping the balance sheet reduction. From this perspective, Japan's rate hike coincidentally becomes the "natural reservoir" for the Federal Reserve's "easing combo": it helps the US absorb excess liquidity, alleviating inflation rebound pressure, while avoiding asset bubbles caused by disorderly global capital flows. This "implicit cooperation" between policies deserves high attention.

3. Global Interest Rate Spread Restructuring: The "Repricing Storm" of Asset Prices

The changes in policy timing and funding flows are driving global asset prices into a repricing cycle, with the differentiation characteristics of different assets becoming increasingly apparent:

• US Stocks: Short-term pressure, long-term profit resilience. The Federal Reserve's rate cut should benefit US stocks, but the withdrawal of carry trade funds triggered by Japan's rate hike creates a hedge. After Ueda's rate hike signal on December 1, the Nasdaq index fell 1.2% that day, with tech giants like Apple and Microsoft dropping over 2%, mainly because these companies are heavily weighted in carry trade funds. However, Capital Economics points out that if the rise in US stocks is due to improved corporate earnings (S&P 500 constituent earnings grew 7.3% year-on-year in the third quarter) rather than valuation bubbles, subsequent declines will be limited.

• Cryptocurrencies: High leverage attributes become a "disaster zone." Cryptocurrencies are an important destination for carry trade funds, and the liquidity contraction triggered by Japan's rate hike has the most direct impact on them. Data shows that Bitcoin has fallen over 23% in the past month, with net outflows from Bitcoin ETFs reaching $3.45 billion in November, of which Japanese investors accounted for 38% of the redemptions. As carry trades continue to unwind, the volatility of cryptocurrencies will further intensify.

• US Treasuries: A tug-of-war between selling pressure and rate cut benefits. The withdrawal of Japanese funds has led to selling pressure on US Treasuries, with the yield on the 10-year US Treasury rising from 3.5% to 3.72% in November; however, the Federal Reserve's rate cut will boost demand in the bond market. Overall, US Treasury yields are expected to maintain a volatile upward trend in the short term, with an anticipated range of 3.7%-3.9% before the end of the year.

Key Question: Is 0.75% Easing or Tightening? Where is the "End Point" of Japan's Rate Hike?

Many fans ask: Is Japan's rate hike to 0.75% considered tightening monetary policy? Here, it is essential to clarify a core concept—the distinction between "easing" and "tightening" in monetary policy hinges on whether the interest rate is above the "neutral rate" (the interest rate level that neither stimulates nor suppresses the economy).

Kazuo Ueda has clearly stated that Japan's neutral rate range is between 1%-2.5%. Even if the rate is raised to 0.75%, it remains below the lower limit of the neutral rate, indicating that the current policy is still in the "easing range." This also explains why the Bank of Japan emphasizes that "rate hikes will not suppress the economy"—for Japan, this is merely an adjustment from "extremely loose" to "moderately loose," and true tightening requires interest rates to break above 1%, supported by the economic fundamentals.

Looking at the subsequent path, Bank of America predicts that the Bank of Japan will "raise rates once every six months," but considering that Japan's government debt ratio is as high as 229.6% (the highest among developed economies), raising rates too quickly would increase government interest expenses. Therefore, gradual rate hikes are highly likely, with 1-2 hikes per year, each by 25 basis points, being the mainstream rhythm.

Final Thoughts: Why is Japan's Rate Hike the "Biggest Variable" in December? Key Signals in the Policy Roadshow

Many fans ask why we keep saying Japan's rate hike is the "biggest variable" in the global market in December.

This is not because the probability of a rate hike is low, but because it hides three layers of "contradictions," keeping the policy direction in a "flexible zone" of "can advance or retreat"—until recently, the central bank released clear signals, making this "variable" gradually enter a controllable range. Looking back, the process from Ueda's speech to the government's tacit approval of the rate hike resembles a "policy roadshow," essentially aimed at mitigating the shocks brought by this variable.

The first contradiction is the "hedge between inflation pressure and economic weakness." Japan's core CPI in Tokyo rose by 3% year-on-year in November, remaining above the target for 43 consecutive months, forcing a rate hike; however, the GDP fell by an annualized 1.8% in the third quarter, and personal consumption growth slowed from 0.4% to 0.1%, meaning the economic fundamentals cannot support aggressive tightening. This dilemma of "wanting to control inflation but fearing to crush the economy" has left the market guessing the central bank's priorities, until the signal of corporate salary increases exceeding 5% emerged, providing an "economic support point" for the rate hike.

The second contradiction is the "conflict between high debt pressure and policy shift." Japan's government debt ratio stands at 229.6%, the highest level among developed economies, relying on zero or even negative interest rates to keep borrowing costs low for the past two decades. Once the rate is raised to 0.75%, the government's annual interest expenses will increase by over 8 trillion yen, equivalent to 1.5% of GDP. This dilemma of "raising rates increases debt risk, while not raising rates allows inflation to run rampant" has led to a policy decision-making process filled with swings, and it wasn't until the Federal Reserve's rate cut window opened that Japan found a buffer space to "leverage the rate hike."

The third contradiction is the "balance between global responsibilities and domestic demands." As the world's third-largest economy and a core hub for the $5 trillion carry trade, Japan's policy changes can directly trigger a global capital tsunami—last August's unexpected rate hike caused the Nasdaq index to plummet by 2.3% in a single day. The central bank needs to stabilize the yen exchange rate and alleviate import inflation through rate hikes while avoiding becoming a "black swan" in the global market. This pressure of "balancing internal and external considerations" keeps the policy release consistently "cautiously vague," leading to market speculation about the timing and magnitude of rate hikes.

It is precisely because of these three contradictions that Japan's rate hike probability has shifted from "50% probability" in early November to "85% certainty" now, making it one of the most unpredictable variables in the December market. The so-called "policy roadshow" involves gradual statements from Kazuo Ueda and information releases from informed sources, allowing the market to gradually digest this variability—so far, the selling of Japanese bonds, slight appreciation of the yen, and stock market fluctuations are all within a controllable range, indicating that this "precautionary measure" has begun to show results.

Now, with an over 80% probability of a rate hike, the variable of "whether to hike" has essentially been eliminated, but new variables have emerged—this is also the core focus of our ongoing attention.

For investors, the real variables lie in two areas:

First is the policy guidance after the rate hike—Will the Bank of Japan clearly state a rhythm of "raising rates once every six months," or will it continue to use vague expressions like "watching economic data"?

Second is Kazuo Ueda's statements—If he mentions the "spring 2026 labor negotiations" as a key reference, it would imply that subsequent rate hikes may slow down; conversely, if he does not, it may accelerate. These details are the core codes that determine the flow of funds.

On December 19, the Bank of Japan's decision and the Federal Reserve's rate cut decision will be announced successively. The overlap of these two major events will cause global capital to "re-align." For us, rather than getting caught up in short-term fluctuations, it is better to focus on the core logic of assets: high-valuation assets that rely on low-cost funds should be approached with caution, while assets with solid fundamentals and low valuations may find opportunities in this major capital shift.

This article is from a submission and does not represent the views of BlockBeats.

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