Yen Carry Trade Collision: How the Bank of Japan's Rate Plans Impact Bitcoin

Welcome to the US Crypto News Morning Briefing—your essential rundown of today's most important developments in the world of cryptocurrency.

Key Takeaways

The Bank of Japan is expected to raise interest rates during its December meeting, which could significantly impact global risk assets, including Bitcoin.
The yen carry trade, where investors borrow yen at low rates and invest in higher-yielding assets, may face major unwinding due to this rate hike.
A previous hike in August 2024 led to a significant decline in the crypto market, with Bitcoin dropping to $49,000.
Analysts are concerned that current market conditions, including simultaneous tightening of liquidity in Japan, the US, and China, could lead to increased volatility.

As global markets remain in a state of cautious anticipation, Japan's bond yields are on the rise while the Bank of Japan (BoJ) hints at a potential rate hike. The long-standing yen carry trade, which has supported stocks, cryptocurrencies, and other risk assets, may be unraveling more quickly than anticipated.

Bitcoin Prepares for Potential Market Shifts as Japan Considers Ending its Cheap Money Era

Global financial markets are on alert as the Bank of Japan (BoJ) prepares for its monetary policy meeting on December 18–19. Recent statements from BoJ Governor Kazuo Ueda and ongoing inflation hovering above 2% have led traders to predict a 90% likelihood of a 25 basis point rate hike.

BoJ Interest Rate Cut probabilities. Source: Polymarket

Currently, Japan’s 2-year government bond yield has surged above 1%, reaching levels not seen since the 2008 Global Financial Crisis. The 10-year Japanese Government Bond (JGB) yield has also hit a 17-year high, raising concerns about escalating borrowing costs.

For almost 30 years, the yen carry trade has encouraged global risk-taking as investors borrowed yen at low interest rates, converted it to dollars, and invested in higher-yielding assets, including US stocks and cryptocurrencies like Bitcoin. However, if the BoJ raises rates or if the yen appreciates, this carry trade can quickly reverse, leading to forced asset sales.

The risks are not theoretical; during a rate hike from BoJ in August 2024, the crypto market lost $600 billion, which included Bitcoin's drop to $49,000, accompanied by $1.14 billion in liquidations. Analysts caution that a similar scenario could unfold if Japanese yields continue to rise.

The BOJ is about to shake crypto markets.
“Japan's likely rate hike to 80% Dec 18-19—this threatens the yen carry trade that's been funding BTC & risk assets for years.” - Paul Barron

Analyst Great Martis describes the BoJ's potential hike as a “canary in the coal mine” for both the crypto market and global economy. He emphasizes that this could signal a broader market turmoil as the unwinding of the carry trade begins.

With the tightening liquidity seen in Japan, the US, and China, hedge funds and institutional investors are cautious, as this rare convergence may push markets towards a period of deleveraging. Nevertheless, some experts argue that most of the leverage was already cleared out since October, suggesting that the impact of the carry trade might not be as severe.

The Yen Carry Trade Is Dead
“Despite low rates, the yen carry trade remains muted and has mostly faded into nostalgia.” - Bob Elliott

What’s Next for Bitcoin and Global Assets in a Tightening Environment?

Nic Puckrin, co-founder of Coin Bureau, notes that historical trends show that quantitative easing (QE) typically follows significant crises, rather than merely in response to routine rate adjustments. The current tightening across Japan, the US, and China indicates that further market corrections may occur before any liquidity support can materialize.

Traders should keep a close watch on liquidity conditions, as Bitcoin and Ethereum often serve as barometers of market stress. The looming decision from the BoJ suggests that if Japan continues its tightening, global deleveraging may stretch into 2026, testing the durability of both cryptocurrency and traditional markets.

As the era of easy money from Japan potentially winds down, investors might face a more volatile market where fundamental value takes precedence over cheap leverage.

Chart of the Day

Japan’s 10-Year Bond Yield. Source: Trading Economics

Byte-Sized Alpha

Here's a quick overview of additional U.S. crypto news to follow today:

Crypto Equities Pre-Market Overview

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