The Importance of the Bank of Japan for Bitcoin Traders

While Bitcoin traders typically turn their attention to the US Federal Reserve, the Bank of Japan (BoJ) holds significant influence over cryptocurrency markets as well. This is largely due to Japan's unique role in the global liquidity landscape. When liquidity conditions tighten, Bitcoin often experiences sharp declines.

Key Takeaways

The Bank of Japan's monetary policy significantly influences Bitcoin prices.
The yen carry trade has made the yen a popular borrowing currency.
Even a small rate hike can precipitate major sell-offs in Bitcoin due to leverage.
Traders closely monitor BoJ guidance and early signs for market movement.
Historical data shows a strong correlation between BoJ rate hikes and Bitcoin price drops.

The Yen Carry Trade: Bitcoin’s Underrated Liquidity Source

For many years, Japan has maintained near-zero or negative interest rates, making the yen one of the most affordable currencies to borrow globally. This environment led to the emergence of the yen carry trade.

The 🇯🇵 Bank of Japan is slated to increase interest rates on Friday, December 19, sparking considerable concern regarding the yen carry trade. Previous rate hikes have seen Bitcoin prices plummet.

But what exactly is causing this? Let’s explore. 👇

Understanding the Yen Carry Trade

For decades, large institutions—such as hedge funds, banks, asset managers, and proprietary trading desks—have taken loans in yen from Japanese banks, the foreign exchange swap markets, and short-term funding avenues. They then convert this yen into dollars or euros, shifting the capital into higher-yielding assets.

These assets can range from equities and credit markets to emerging markets and, increasingly, cryptocurrencies. Bitcoin stands out because it benefits from access to cheap and plentiful funding. Its continuous trading and high volatility make it an attractive option for leveraged funds looking to express their risk appetites.

However, a rate hike by the BoJ disrupts this system.

🚨 JAPAN WILL CRASH BITCOIN IN 5 DAYS!!!

There's a real underestimation of the impact Japan's actions may have on Bitcoin.

The Bank of Japan is expected to raise rates again on December 19.

While this may not seem significant at first glance, it’s crucial to consider one key factor: Japan is the largest holder… pic.twitter.com/0a9Aimfn88
— NoLimit (@NoLimitGains)

Why a Minor Rate Hike by the BoJ Can Have Major Consequences

In theory, the anticipated BoJ move appears minimal, with markets predicting a hike of approximately 25 basis points, bringing Japan's policy rate closer to 0.75%. This is still considerably lower than rates in the US or Europe.

However, the magnitude of the hike is not the main concern. After years of being anchored near zero, even a small increase signifies a fundamental shift in funding conditions.

More importantly, it can alter market expectations. If investors anticipate that Japan is embarking on a multi-step tightening cycle, they may rush to cut their exposure early, triggering selling pressure across global risk assets. Bitcoin typically feels these effects quickly because it trades continuously and reacts faster than stocks or bonds.

How BoJ Tightening Can Cause Bitcoin Liquidations

Bitcoin's most significant declines often stem from leverage rather than spot selling. A hawkish move from the BoJ can strengthen the yen and increase global yields, creating simultaneous pressure on risk assets.

As Bitcoin breaches essential technical levels, which is critical because the crypto market relies heavily on perpetual futures and margin, the declining price pushes leveraged long positions to their liquidation points. Exchanges are required to sell collateral automatically to cover these losses.

The Bank of Japan is set to raise interest rates by 25 basis points on December 19.

Historically, during the last three BoJ rate hikes, Bitcoin experienced declines of over 20%:

March 2024 → -27%
July 2024 → -30%
January 2025 → -31%

Last week, we already observed a 7% decline as some investors attempted to preemptively address the upcoming drop.

However,… pic.twitter.com/ex77EzHBMh
— Lark Davis (@LarkDavis)

Continued forced selling can further decrease Bitcoin’s value, creating a cascading effect with additional liquidations. This phenomenon illustrates why macroeconomic events can lead to what appear to be crypto-specific crashes. The first jolt originates from interest rates and foreign exchange movements, while the subsequent dip arises from crypto’s leverage structure.

What Traders Monitor Around BoJ Announcements

Leading up to BoJ announcements, risk builds among traders. They are vigilant for early warning signs:

The tone of the BoJ’s guidance is also essential. A rate hike coupled with dovish messaging can stabilize markets, whereas a hawkish signal might amplify selling pressure.

In summary, the Bank of Japan is crucial because it governs a major source of global liquidity. When this liquidity tightens, Bitcoin often pays the price first.