Diverging US-Japan Policies: With an 80% Chance of a Rate Hike in Japan, Is Global Capital Flow Shifting?

On December 19, the Bank of Japan’s rate decision and the Federal Reserve’s rate cut decision will be announced in succession. The overlap of these two major events will prompt global capital to realign its positions. For us, instead of fixating on short-term ups and downs, it’s better to focus on the core logic behind asset allocation: highly valued assets that rely on low-cost capital require caution, while assets with solid fundamentals and low valuations may find opportunities in this great capital reshuffle.

Author: Xiuhu

Source: MarsBit

The global financial markets in December have been pushed to the forefront by three “monetary policy dramas”—in addition to the high expectations for a Fed rate cut (markets are betting on a 25 basis point cut in December), the Bank of Japan is sending out strong hawkish signals (Bank of America warns of a December rate hike to 0.75%, the highest since 1995), and one key change that many have overlooked: the Fed has officially ended QT (quantitative tightening) as of December 1, bringing a three-year tightening cycle to a close.

The policy mix of “rate cuts + end of QT” and “rate hikes” is rewriting the global liquidity landscape: the Fed is stopping “draining liquidity” and preparing to “flood the market,” while the Bank of Japan is tightening the “money bag.” Amid this push and pull, $5 trillion in yen carry trades face reversal, global interest rate differentials are being rapidly restructured, and the pricing logic for US stocks, crypto, and US Treasuries could be fundamentally rewritten. Today, let’s break down the logic of these impacts—where will the money go, and where are the risks hiding?

Key Point: Japan’s rate hike is not a “sudden attack”—an 80% probability is hiding in these signals

Rather than asking “will they hike,” the market now cares more about “how” and “what comes after.” According to informed sources, Bank of Japan officials are prepared for a rate hike at the policy meeting ending on December 19, provided there is no major economic or financial shock. Data from the US prediction market Polymarket shows the probability of a 25 basis point BOJ rate hike in December has jumped from 50% to 85%, making it a near certainty.

There are two key backgrounds to this rate hike:

First, domestic inflation pressures persist. Tokyo’s core CPI for November rose 3% year-over-year, marking 43 consecutive months above the 2% target, and yen depreciation has further pushed up import prices.

Second, there’s economic support: average wage hikes at Japanese companies have exceeded 5% this year—a decades-high jump that gives the BOJ confidence in the economy’s capacity to bear higher rates. More importantly, BOJ Governor Ueda gave a clear signal as early as December 1, and this “advance spoiler” is itself part of the policy—preparing the market and avoiding a repeat of last August’s “surprise hike/global stock crash” scenario.

Core Impact: Policy sequencing games—the direction of capital flows holds the key

1. Policy sequencing: Fed “loosens first,” BOJ “tightens later”—the underlying logic

On the timeline, the Fed is likely to cut rates by 25 basis points at its December meeting first, while the BOJ plans to follow with a hike at its December 19 meeting. This “loose then tight” combo is no coincidence, but a rational choice based on each side’s economic needs—two layers of logic:

For the Fed, “stop QT first, then cut rates” is a “dual defense” approach to slower economic growth. Stopping QT on December 1 was step one—ending the tightening cycle that started in 2022. As of November, the Fed’s balance sheet had shrunk from a $9 trillion peak to $6.6 trillion but still sits $2.5 trillion above pre-pandemic levels. Stopping the liquidity drain aims to ease money market strains and prevent rate volatility from reserve shortages. On this basis, a rate cut is the second, “proactive stimulus” step: the November US ISM manufacturing PMI fell to 47.8, below the expansion/contraction threshold for three straight months; core PCE inflation dropped to 2.8%, but consumer confidence fell 2.7 percentage points month-on-month, and with $38 trillion in federal debt interest looming, the Fed needs rate cuts to lower financing costs and stabilize expectations. Acting “first” allows the Fed to seize policy initiative and leave room for possible future shocks.

For the BOJ, “delayed tightening” is a “proactive adjustment” to avoid risk. According to analyst Zhang Ze’en from Western Securities, the BOJ is purposely hiking after the Fed cuts—on one hand, capitalizing on the Fed’s liquidity easing window to soften the domestic impact, and on the other, with Fed cuts pulling US Treasury yields down, a BOJ hike quickly narrows the US-Japan rate spread, boosts yen asset appeal, and accelerates capital repatriation. This “going with the flow” approach gives Japan more control as it normalizes policy.

2. Capital absorption: Will Japan’s rate hike become the Fed’s “natural reservoir”?

Looking at US M2 data and capital flows, Japan’s rate hike is highly likely to absorb liquidity released by the Fed—three key facts support this:

First, US M2 and policy actions point to a “double liquidity boost.” As of November 2025, US M2 stood at $22.3 trillion, up $130 billion from October, and annual M2 growth rose to 1.4%—already showing the effect of ending QT. The dual policy will further expand liquidity: ending QT means about $95 billion less in monthly liquidity drain, a 25 basis point rate cut is expected to release $550 billion more, and together they create a December “liquidity windfall” in the US. But with domestic investment returns falling—the S&P 500’s average ROE dropped from 21% last year to 18.7%—this extra capital is urgently seeking new returns.

Second, Japan’s rate hike creates a “yield catch-up effect.” With the BOJ hiking to 0.75%, Japan’s 10-year government bond yield has risen to 1.910%, narrowing the gap with the US 10-year (currently at 3.72%) to 1.81 percentage points—the lowest since 2015. For global capital, yen assets have become much more attractive. Japan, as the world’s largest net creditor, holds $1.189 trillion in US Treasuries. As local yields rise, this money is rapidly returning home—Japan sold a net $12.7 billion in US Treasuries in November alone.

Finally, the reversal of carry trades and liquidity boost creates “precise absorption.” Over the past two decades, the “borrow yen, buy US Treasuries” trade has exceeded $5 trillion. The Fed’s “end QT + rate cut” liquidity boost, combined with Japan’s higher yields, will fundamentally reverse this trade. Capital Economics’ calculations show that if the US-Japan rate spread narrows to 1.5 percentage points, at least $1.2 trillion in carry trades will be unwound, with about $600 billion returning to Japan—enough to absorb the $550 billion released by the rate cut and part of the liquidity left by ending QT. In this sense, Japan’s timely rate hike becomes the Fed’s “natural reservoir”: it helps absorb excess liquidity, relieves inflation risks in the US, and avoids global asset bubbles from disorderly capital flows—this “implicit policy coordination” is worth close attention.

3. Global rate spread restructuring: A “repricing storm” for asset prices

Policy sequencing and capital flow changes are driving a global asset repricing cycle, with growing divergence among asset classes:

• US stocks: Short-term pressure, long-term depends on earnings resilience. Fed cuts should benefit US equities, but the withdrawal of carry trade capital due to the BOJ hike provides a counterweight. After Ueda’s December 1 hike signal, the Nasdaq fell 1.2% that day, with Apple, Microsoft, and other tech giants down over 2%—mainly because they are heavily weighted by carry trade capital. However, Capital Economics notes that if US stock gains are driven by earnings growth (Q3 S&P 500 earnings up 7.3% YoY), not valuation bubbles, declines should be limited.

• Cryptocurrency: High leverage makes it a “hardest-hit area.” Crypto is a key destination for carry trade capital, and Japan’s rate hike-induced liquidity tightening hits it directly. Bitcoin has dropped over 23% in the past month, and November saw $3.45 billion net outflow from Bitcoin ETFs, with Japanese investors accounting for 38% of net redemptions. As more carry trades unwind, crypto volatility will likely intensify.

• US Treasuries: “Tug of war” between selling pressure and rate cut support. Japanese money leaving puts pressure on Treasuries; the 10-year yield rose from 3.5% to 3.72% in November. However, Fed cuts will support demand for Treasuries. Overall, yields are likely to remain volatile and trend higher, expected to fluctuate between 3.7% and 3.9% by year-end.

Key Question: Is 0.75% Easing or Tightening? Where is the endpoint for Japan’s rate hikes?

Many readers ask: Is a 0.75% BOJ rate hike considered tightening? Here’s a key concept—the “easiness” or “tightness” of monetary policy depends on whether rates are above the “neutral rate” (the rate that neither stimulates nor restrains the economy).

Ueda has clearly stated that Japan’s neutral rate is 1%–2.5%. Even at 0.75%, rates are below the neutral lower bound, meaning the policy is still “accommodative.” That’s why the BOJ stresses that “rate hikes won’t hurt the economy”—for Japan, this is just an adjustment from “ultra-loose” to “mildly accommodative.” True tightening requires rates to breach 1% and for economic fundamentals to stay strong.

Looking ahead, Bank of America forecasts that the BOJ will “hike every six months,” but with Japan’s government debt at 229.6% of GDP (the highest among developed economies), hiking too fast would sharply raise government interest costs. Gradual rate hikes are thus the likely scenario—one or two hikes a year, 25 basis points each time, will be the mainstream pace.

Final Thoughts: Why is Japan’s rate hike December’s “biggest wild card”? Key signals from the policy “roadshow”

Many readers ask why we keep saying Japan’s rate hike is December’s “biggest wild card” in global markets.

It’s not because the probability is low, but because three layers of “contradiction” keep the policy path ambiguous—until recently, when the BOJ started sending clear signals and the “wild card” became more manageable. In retrospect, from Ueda’s comments to tacit government approval, the whole process resembles a “policy roadshow,” essentially diffusing the shock of uncertainty.

The first contradiction is the “counterbalance of inflation pressure and economic weakness.” Tokyo’s November core CPI was up 3% year-over-year, 43 consecutive months above target, forcing a rate hike; but Q3 GDP plunged at an annualized rate of 1.8%, and personal consumption growth slowed from 0.4% to 0.1%—the economic base isn’t strong enough for aggressive tightening. This dilemma—“curb inflation but don’t crush the economy”—kept markets guessing the BOJ’s priorities until wage hikes above 5% signaled economic support for a hike.

The second contradiction is the “conflict between debt pressure and policy shift.” Japan’s government debt is 229.6% of GDP, the highest among developed economies, and has relied on zero or negative rates for two decades to keep borrowing costs down. A hike to 0.75% would add over 8 trillion yen in annual interest—about 1.5% of GDP. This dilemma—“hike and increase debt risk, or don’t hike and let inflation run”—made policy decisions waver, until the Fed’s rate cut window appeared, giving Japan “room to hike with less risk.”

The third contradiction is the “balance between global responsibility and domestic needs.” As the world’s third-largest economy and the hub of $5 trillion in carry trades, Japan’s policies can trigger global capital waves—last August’s surprise hike caused a 2.3% one-day drop in the Nasdaq. The BOJ needs to use rate hikes to stabilize the yen and curb import inflation, but also avoid being the “black swan” for global markets. This “dual focus” has kept policy signals cautious and ambiguous, and the market guessing on timing and magnitude.

Because of these three contradictions, Japan’s hike probability rose from “50% in early November” to “85% certainty” now, making it the toughest variable to predict in December’s markets. The “policy roadshow”—from Ueda’s gradual signals to insider leaks—has allowed markets to digest the uncertainty. So far, JGB selling, modest yen appreciation, and stock market volatility are all within the controllable range, showing the “precautionary shot” is working.

Now, with a hike probability above 80%, the “will it happen” variable is mostly gone, but new uncertainties have emerged—these remain our focus.

For investors, the real variables lie in two areas:

First, post-hike policy guidance—will the BOJ clearly state “one hike every six months,” or continue with vague “data-dependent” language?

Second, Ueda’s remarks—if he refers to the “2026 spring wage negotiations” as a key reference, it could mean the pace of hikes will slow; otherwise, it may accelerate. These details are the real code for capital flows.

On December 19, the BOJ and Fed will both announce key decisions. The combination of these two major events will prompt global capital to realign. For us, rather than worry about short-term price swings, it’s better to focus on the core logic: be cautious with high-valuation assets dependent on cheap capital, and look for opportunities in assets with strong fundamentals and low valuations during this grand capital migration.