The Bank of Japan is on the verge of raising interest rates, and global liquidity faces tightening

The Governor of the Bank of Japan, Ueda Kazuo, once again signaled a rate hike at the New Year meeting on January 5, stating that if the economic outlook materializes, the central bank will continue to raise the benchmark interest rate. This statement may seem modest, but it reflects the Bank of Japan’s firm determination to shift from ultra-loose policies toward normalization. Coupled with the fact that Japan has already raised interest rates to 0.75% in December 2025, market expectations for an interest rate hike cycle have already been set in motion. What does this mean for the global liquidity landscape? And what impact will it have on the crypto market?

Background of the Bank of Japan’s Policy Shift

Passive Choice Under Debt Pressure

The BOJ’s rate hike is not an active move but a forced response. According to the latest data, Japan’s government debt as a percentage of GDP has surpassed 230%, with government bond yields soaring to 2.07%, reaching a historical high since 1997. This means that every interest rate increase directly adds to Japan’s debt servicing burden.

The BOJ faces a dilemma: continuing ultra-loose policies will push government bond yields higher, increasing the risk of a debt crisis; but raising rates will also intensify short-term fiscal pressures. In this forced choice, the central bank has opted for a gradual rate hike path—aiming to exit the negative interest rate era while avoiding excessive shocks.

Pressure from the Global Macro Environment

Another driver of Japan’s rate hike comes from the global macro environment. While the Federal Reserve is cutting rates, US Treasury yields remain high, and the US-Japan yield spread has narrowed to 2.09%, meaning the attractiveness of yen arbitrage trading (borrowing low-cost yen to invest in higher-yield assets) is rapidly declining.

Against this backdrop, Japan’s rate hike is not only a domestic policy adjustment but also an active change in the global capital flow pattern.

Impact Pathways of Rate Hikes on Global Liquidity

Yen Arbitrage Trading Faces Risks

For years, yen arbitrage trading has been a key strategy for global investors. Investors borrow yen at near-zero costs, convert to USD or other currencies, and invest in high-yield assets such as US Treasuries, US stocks, or cryptocurrencies. This strategy has been highly profitable in Japan’s ultra-low interest rate environment.

However, with the BOJ’s rate hike, borrowing costs rise, compressing the profit margins of this strategy. Historical data shows that after the previous three BOJ rate hikes, Bitcoin experienced 20%-30% corrections. The reason is simple: institutions are forced to liquidate high-risk assets to raise cash, and highly liquid markets like cryptocurrencies are often the first to be sold off.

Divergence Between US and Japan Policies

The current macro landscape presents a “loose-tight” dichotomy: the Fed is cutting rates, while the BOJ is raising them. What are the potential consequences?

According to relevant analyses, this creates a complex liquidity game. The US dollar remains relatively strong, but the return of yen arbitrage funds could impact global risk assets. As a highly liquid market, the crypto market faces the most direct pressure.

Short-term Pressure and Mid-term Opportunities in the Crypto Market

Recent Market Reactions

Recent market performance shows signs of stress. Bitcoin has fallen from $90,000 to below $86,000, closely related to the rising expectations of BOJ rate hikes and yen arbitrage unwinding. Data indicates that after the BOJ’s rate hikes, global risk assets have faced panic selling, and Bitcoin may continue to be under pressure.

Key Observation Windows

However, this does not mean the crypto market will continue to decline indefinitely. On the contrary, several key dates in January warrant close attention:

• January 9: Fed Chair nomination and US unemployment rate data, which will influence market expectations of the Fed’s rate cut pace
• January 13: US CPI inflation data, a pivotal point for January sentiment
• January 22: BOJ interest rate decision, which will confirm the rate hike path
• January 27-28: FOMC meeting, providing policy guidance for the year

Any of these events could alter market perceptions of liquidity prospects.

Future Outlook

The BOJ’s rate hikes do not necessarily mean a sharp tightening of global liquidity. The Fed’s rate cut expectations still exist, which will partly offset the impact of Japan’s rate hikes. However, it is clear that the global liquidity landscape is undergoing profound changes.

In the medium term, the normalization of BOJ policies is an irreversible trend. This means that high-risk assets previously driven up by yen arbitrage funds need to be re-priced. The long-term logic of the crypto market (such as the launch of Bitcoin spot ETFs and increased institutional allocations) remains valid, but a period of adjustment may be necessary in the short term.

For investors, the key is to understand the macro backdrop rather than be misled by short-term volatility. The BOJ’s rate hike is a structural shift that should be viewed with a medium-term perspective.

Summary

The signals from the BOJ indicate that the era of global ultra-loose monetary policy is coming to an end. While the rate hike path may be gradual, its impact on global liquidity is profound. Yen arbitrage trading faces risks, and the crypto market may experience short-term pressure, but this also offers rational investors an opportunity to reassess asset values.

Multiple macroeconomic events in January will determine market direction. During this critical period, paying attention to Fed policies, BOJ decisions, and global debt conditions is more important than chasing short-term gains or losses. The shift in liquidity is underway—understanding this process is essential to seize opportunities amid the changing landscape.