BOJ Rate Hike Threatens Yen Carry Trade, Bitcoin Faces Liquidity Test

The Bank of Japan’s anticipated move to raise interest rates for the second time this year represents more than a minor policy adjustment; it signals a sustained normalization effort that could extend into 2026. This pivot by the world’s fourth-largest economy directly threatens the yen carry trade, a cornerstone of global liquidity for years. The trade involves borrowing Japanese yen, which has been available at near-zero rates for decades, to invest in higher-yielding U.S. dollar assets. The profit comes from the interest rate differential, and the resulting flow of cheap capital has historically greased rallies in risk assets, including Bitcoin.

Czhang Lin, head of LBank Labs and partner at LBank, explained the profound shift to Decrypt: “The BOJ’s rate hike stealthily normalizes the yen—unwinding the carry trade fuel that’s greased global risk assets for years, flipping liquidity from a gush to a grind.” He argues this environment “heralds dollar strength, equity wobbles, and crypto drag.” The broader impact, according to Lin, is a fundamental culling of market speculation. While such volatility can create niche arbitrage opportunities, he notes these are “scarce in fundamental shifts,” concluding that “hikes cull speculation; BTC’s scarcity outshines alt vapor in a fiat famine.”

Not all analysts foresee a sustained, one-directional drag on crypto from the BOJ’s actions. Matt Hougan, Chief Investment Officer of Bitwise, presents a more nuanced view of a conflicted global macroeconomic environment. “The Japanese interest rate hike points out that the global macro environment for crypto is mixed and confused,” Hougan told Decrypt. He highlights the opposing forces at play: “You have Japan raising interest rates (bad for crypto) and the US lowering interest rates (good for crypto). You have the Fed buying Treasuries and Europe stumbling to stagnation.”

Hougan suspects these countervailing trends “will generally cancel out over time, and that macro will not be a major long-term driver of crypto returns in 2026.” However, he acknowledges that in the near term, they will “contribute to volatility, as markets sway from excited (Fed rates are falling!) to scared (unwinding the carry trade).” This perspective suggests that while the BOJ’s policy shift is significant, its long-term impact on assets like Bitcoin may be neutralized by other major central bank actions, particularly from the Federal Reserve.

Despite the hike being widely anticipated and therefore theoretically priced in, market participants warn of immediate turbulence. Hougan notes that while the move is “fully anticipated,” it remains “a scary headline—Japanese interest rates at a 30-year high!—and in the current market environment, you could see short-term downward pressure as investors react to that headline.” This potential for a knee-jerk sell-off is amplified by the cryptocurrency market’s current state. Bitcoin, trading at approximately $87,800 according to CoinGecko data, is down nearly 30% from its October 6 peak of $126,080.

The market is entering a period of characteristically low liquidity due to the holidays, making it fragile and prone to exaggerated moves. This thin trading environment means any reaction to the BOJ’s guidance on its future rate trajectory could be amplified, potentially triggering significant liquidation events. The sentiment among investors reflects this caution. On the prediction market Myriad, owned by Decrypt’s parent company Dastan, the probability assigned to Bitcoin retesting $100,000 has dipped slightly to 66% from 72% a week ago, indicating tempered optimism.

Ultimately, the focus for crypto traders this week extends beyond the rate decision itself to the BOJ’s forward guidance. The potential pace and scale of the unwinding of yen-funded carry trades will be critical in determining shifts in global capital flows. As the market navigates this transition from an era of ultra-cheap Japanese liquidity, Bitcoin faces a key macroeconomic test, with its price action likely to reflect the tension between tightening conditions from Japan and other, potentially looser, global forces.