Rising interest rates in Japan and a firmer yen could disrupt carry trades and weigh on crypto markets, even as U.S. monetary policy turns more accommodative.

The Bank of Japan is widely expected to raise its policy rate by 25 basis points to 0.75% from 0.50%, marking its first hike since January, according to Nikkei. A decision is anticipated on Dec. 19 and would push Japanese interest rates to their highest level in roughly three decades.

While the broader market impact remains uncertain, shifts in Japanese monetary policy have historically posed headwinds for bitcoin and the wider digital asset market. Periods of yen strength have often coincided with downside pressure on BTC, while a weaker yen has tended to support higher prices. A strengthening yen typically tightens global liquidity conditions—an environment to which bitcoin has shown particular sensitivity.

The yen is currently trading near 156 per dollar, modestly stronger than its late-November peak above 157.

A rate increase could also affect bitcoin indirectly through equity markets by undermining the yen carry trade. For years, hedge funds and proprietary trading desks have borrowed yen at ultra-low—or even negative—rates to finance investments in higher-risk assets such as U.S. equities and Treasurys, a strategy made possible by Japan’s prolonged period of loose monetary policy.

Higher Japanese rates could reduce the appeal of these trades, potentially reversing capital flows and triggering broader risk aversion across stocks and cryptocurrencies.

These concerns have precedent. When the BoJ last raised rates to 0.5% on July 31, 2024, the yen rallied sharply, contributing to a bout of global risk-off sentiment in early August that saw bitcoin fall from around $65,000 to near $50,000.

Why this time may be different

Despite the risks, the upcoming hike may not trigger a similar risk-off episode for two key reasons. First, speculative positioning in the yen is already net long, reducing the likelihood of a sharp post-decision rally. This contrasts with mid-2024, when futures data showed traders were broadly bearish on the currency.

Second, Japanese government bond yields have climbed steadily throughout the year, reaching multi-decade highs at both the short and long ends of the curve. As a result, the expected rate hike largely reflects policymakers aligning official rates with market realities rather than delivering a surprise tightening.

At the same time, U.S. monetary conditions are moving in the opposite direction. The Federal Reserve this week cut rates by 25 basis points to a three-year low and introduced additional liquidity measures, while the dollar index slipped to a seven-week low.

Taken together, these factors point to a relatively low probability of a sharp yen carry unwind or widespread year-end risk aversion.

Still, Japan’s longer-term fiscal position remains a concern. With debt approaching 240% of GDP, investors are watching closely for signs that fiscal dynamics could become a source of volatility in 2025.

“Under Prime Minister Sanae Takaichi, significant fiscal expansion and tax cuts are arriving while inflation remains near 3% and the BoJ keeps policy too loose, still behaving as if Japan were trapped in deflation,” MacroHive said in a recent market note. “With high debt levels and rising inflation expectations, questions around central bank credibility could steepen JGB yields, weaken the yen, and shift Japan’s image from safe haven toward fiscal risk.”