Bank of Japan Considers Raising Rates to Highest Level Since 1995

The Bank of Japan (BOJ) is contemplating a policy rate increase to 0.75% during its upcoming meeting on December 18-19. This would represent the first hike since January 2025, elevating borrowing costs to their peak in thirty years.

Key Takeaways

The Bank of Japan (BOJ) is planning to raise its policy interest rate to 0.75%.
This will be the first increase since January 2025, marking the highest borrowing costs in thirty years.
Bitcoin and Ethereum are under stress ahead of this decision, with Bitcoin recently dropping significantly.
Japanese government bond yields have reached levels not seen since mid-2007.
New stablecoin initiatives may influence Japan’s sovereign debt landscape amid BOJ's policy adjustments.
Upcoming tax reforms aim to standardize crypto trading taxation, which will affect the market structure.

Bank of Japan Eyes Rate Hike to Highest Level Since 1995

Nikkei reports that BOJ Governor Kazuo Ueda and his executive committee have expressed their intentions to propose the rate increase. A majority of the nine-member Policy Board is anticipated to back the 25-basis-point rise from the current 0.5% rate.

This decision coincides with Japan's 10-year government bond yields, which have surged to 1.94%, the highest level since mid-2007. Prime Minister Sanae Takaichi’s administration has increasingly favored a strategy of monetary tightening.

Meanwhile, Bitcoin and Ethereum are experiencing heightened pressure as the deadline approaches for this significant policy change.

Crypto Markets React to Policy Changes

Bitcoin was trading around $86,000 in early December before suffering a notable 5% decline in a single session. This drop briefly pushed Bitcoin below $85,000, leading to over $637 million in liquidations for long positions.

During this period, the Crypto Fear and Greed Index fell into the "extreme fear" category near 20, down from a low of around 10. The BOJ’s policy shift has tightened financial conditions and diminished the appetite for leverage that had previously bolstered crypto rallies.

Ignacio Aguirre, the Chief Marketing Officer at Bitget, commented that a stronger yen "raises the risk of unwinding yen carry trades, which could temporarily impact crypto valuations as leveraged positions adjust in global markets."

In December, Bitcoin faced its largest single-day liquidation, with around $251.69 million wiped out, while Ethereum experienced roughly $111.31 million in liquidations.

Furthermore, the sell-off in Japanese government bonds has affected global markets, causing 10-year U.S. Treasury yields to rise to approximately 4.08%.

The downturn in Bitcoin's price has also impacted crypto-related stocks, contributing to sharp declines in shares of MicroStrategy, Coinbase, and Robinhood.

Stablecoin Growth and Bond Market Adjustments

The development of Japan's emerging stablecoin sector is poised to reshape the landscape of sovereign debt as the BOJ moves away from extensive bond purchases after years of aggressive easing.

JPYC, the issuer of Japan’s first yen-pegged stablecoin launched in October under the revised Payment Services Act, aims for a circulation of 10 trillion yen within three years. The plan is for JPYC to allocate 80% of its proceeds into Japanese government bonds (JGBs) and 20% into bank deposits, potentially filling the void created by the BOJ's retreat from a market where it currently holds about 50% of the total 1,055 trillion yen.

The Financial Services Agency (FSA) has backed a pilot program with Japan's three major banks to establish a shared framework for issuing yen-backed stablecoins, initially focusing on corporate clients.

In parallel, the government is gearing up for its most significant overhaul of crypto oversight in nearly ten years, shifting regulatory authority from the Payment Services Act to the Financial Instruments and Exchange Act to regulate digital assets similarly to traditional investments.

Tax Reforms and Institutional Engagement Point Toward Market Maturity

Japan is set to implement a flat 20% tax on crypto trading profits starting in 2026, replacing the current progressive rates that can reach 55%. This reform will classify digital assets alongside stocks within a separate tax framework—allocating 15% to the central government and 5% to local municipalities.

Additionally, Nomura Asset Management has established a task force to devise product strategies in anticipation of upcoming regulatory changes. Meanwhile, Daiwa Asset Management is collaborating with ETF expert Global X Japan.

Despite the immediate volatility arising from BOJ's tightening policy, Aguirre forecasted that Bitcoin could "retest the $95,000–$100,000 range by early 2026, while Ethereum might rise toward $3,800 if institutional investments resume and macroeconomic conditions stabilize."

Notably, the Japan Exchange Group is considering stricter rules for companies transitioning to significant crypto holdings, following concerns over investor protection connected to recent high-profile losses. The FSA also plans to mandate that crypto exchanges maintain dedicated liability reserves against customer losses, mirroring practices established in Japan's securities market following notable hacks, including the $48.2 billion theft from DMM Bitcoin in May 2024.