Japan’s Rate Hikes Could Put Bitcoin and the Yen Carry Trade Under Pressure

Japan’s recovery from its decades-long economic slump could have major consequences for Bitcoin and global risk markets. After the country’s asset bubble collapsed in the early 1990s, the Bank of Japan (BOJ) kept interest rates near zero from 1999 and eventually introduced negative rates in 2016. That era of ultra-cheap borrowing helped fuel the global yen carry trade.

Investors could borrow yen at minimal cost and move the money into higher-yielding assets, including US bonds, technology stocks and, eventually, cryptocurrencies. Bitcoin’s rise therefore coincided with decades of unusually loose Japanese monetary policy.

Now, that environment is changing. Japan is recording nominal economic growth again, while persistent inflation and a weak yen are increasing pressure on the BOJ to raise rates. The yen recently fell near 164 per US dollar, reaching its weakest nominal level in roughly four decades. Intervention by Japan and the US provided only temporary relief, with USD/JPY later returning toward 159.50.

US Treasury Secretary Scott Bessent has argued that higher Japanese interest rates offer a more durable solution. Markets are also anticipating another BOJ rate hike by October. Japan’s policy rate currently stands at 1%, compared with a US federal funds target range of 3.50%-3.75%.

For crypto investors, narrowing that gap matters. Higher BOJ rates make borrowing yen more expensive, potentially forcing traders to unwind leveraged positions and reduce exposure to risk assets.

Markets have already seen how disruptive a yen carry trade unwind can become. Following a surprise BOJ rate increase in July 2024, Bitcoin dropped roughly 25% in a week to around $49,000, while Japanese equities suffered their sharpest daily decline since 1987.

Bitcoin is currently trading near $64,700, with markets relatively stable. However, further BOJ tightening could test that calm. BitMEX co-founder Arthur Hayes offers an alternative scenario, arguing that a Federal Reserve-backed effort to support the yen could increase liquidity and ultimately benefit Bitcoin.

After decades of cheap Japanese money, the BOJ’s September and October meetings could provide the next major signal for Bitcoin, the yen carry trade and global liquidity.