Japan's Monday-to-Sunday interest rate hike storm: Will Bitcoin repeat historical declines?

The cryptocurrency market is facing a critical moment. The Bank of Japan is set to hold its rate decision meeting this week, and this decision will not only impact Japan domestically but also send ripples through global capital flows, affecting risk assets. According to data from the prediction platform Polymarket, the market has almost fully priced in a 25 basis point rate hike by the BOJ, with a probability of up to 97%. Currently, Bitcoin is trading around $90.11K, but investors’ focus has already shifted: after previous rate hikes in Japan, how much did Bitcoin typically decline?

The End of the Cheap Money Era: The Last Days of Yen Arbitrage Trading

Over the past decades, the global financial markets have been built on a fundamental assumption — Japan offers the cheapest capital in the world. Institutional investors have employed a “Yen arbitrage trading” strategy, borrowing yen at ultra-low interest rates and investing in global stocks, bonds, and cryptocurrencies to earn the interest rate differential. This low-cost financing system has fueled asset bubbles over the past ten-plus years.

Now, this game is approaching its end. If the rate hike materializes, Japan’s policy rate will rise to 0.75%, the highest in nearly 20 years. For the global financial system, this signals the end of an era. Analyst Mister Crypto points out that as Japanese bond yields rapidly climb, arbitrage trades relying on low-cost yen financing are shrinking quickly.

What does this mean? Simply put, rising borrowing costs will force leveraged positions to be liquidated. Investors will be compelled to sell risk assets to repay debts, and Bitcoin is among the first to be affected.

Historical Patterns Repeated: 20%-30% Declines After Rate Hikes

Historical data makes the market nervous. Traders have revisited past rate hike episodes:

• March 2024 BOJ rate hike: Bitcoin dropped about 23%
• July 2024 BOJ rate hike: Bitcoin dropped about 25%
• January 2025 BOJ rate hike: Bitcoin declined over 30%

These three rate hikes outline a clear pattern. Analyst 0xNobler warns that, based on this pattern, if the rate hike is confirmed this week, Bitcoin could face a downward challenge risking a drop below $70,000. The market generally considers the “retouching $70K” scenario as increasingly incorporated into risk management plans.

However, some voices caution that this linear thinking might be too absolute. Past patterns do not necessarily repeat, and new variables are changing the game.

An Alternative Scenario: Institutional Investors Discover a “System Shift” Opportunity

Not everyone believes that rate hikes are necessarily bearish. Another perspective highlights an overlooked factor: the Fed’s easing cycle.

Quantitative Ascend, a macro analyst, offers an interesting view. He believes this is not simply a liquidity contraction but a “system shift.” The BOJ’s moderate rate hike will support the yen, but the real liquidity injection comes from the Fed’s rate-cut cycle — which will release dollar liquidity and weaken the dollar’s strength.

In this scenario, capital may not have nowhere to go but instead rotate into risk assets with asymmetric upside potential. Cryptocurrencies are at this “sweet spot” — relatively controllable risk but ample return potential. If the Fed’s liquidity injection is strong enough, it could even offset the negative effects of the BOJ’s rate hike.

Short-term Pain Is Unavoidable: Signals of Liquidity Exhaustion by Year-End

Despite differing long-term views, short-term market vulnerabilities warrant caution. Analyst The Great Martis points out that the bond market is already pressuring the BOJ, potentially triggering a wave of unwindings in arbitrage trades, causing chain reactions in the stock market.

Meanwhile, multiple warning signals have emerged: major stock indices show signs of head expansion, global yields are rising in tandem, all indicating pressure is accumulating within the system. Analyst Daan Crypto Trades also notes that before the year-end holidays, market liquidity is already low, investor confidence is weak, and policy uncertainties could lead to abnormal volatility in the short term.

Since December, Bitcoin’s price has been flat and lacking clear direction, reflecting this uncertainty.

A Critical Moment: How Japan’s Rate Hike Will Reshape the Global Asset Landscape

As the BOJ decision approaches, Bitcoin and the entire crypto market stand at a crossroads. This rate hike will undoubtedly be one of the most influential macroeconomic catalysts of the year.

Whether it triggers another sharp correction or lays the groundwork for a rebound, the key may not only be “whether the rate hike occurs” but also how global liquidity responds in the coming weeks to this turning point. The BOJ’s decision is just the prelude; the real determinant of market direction will be the global financial system’s reaction to this shift.