Why does the yen rise after interest rate hikes? The global liquidity crisis behind the $500 billion arbitrage position

The Bank of Japan raised its policy interest rate to 0.75% last Friday, reaching a 30-year high, yet it failed to strengthen the yen. Instead, USD/JPY broke through 157.4, illustrating the textbook paradox of “rising interest rates, currency depreciation.” What market logic is hidden behind this?

Yield Spread Temptation vs. Hike Commitment Confrontation

Why did the BOJ’s hawkish signals fail?

On the surface, rate hikes signal a strong currency. But the market has already seen through this—Japan’s 0.75% interest rate, compared to over 4.5% yields in the US, still leaves a huge interest rate differential. Investors’ calculations are simple: as long as the BOJ is not in a hurry to hike again, the arbitrage model still holds.

According to estimates from Morgan Stanley, about $500 billion in yen carry trades remain unhedged globally. These funds borrow yen at the lowest cost and then invest in US tech stocks, emerging markets, and cryptocurrencies. The additional cost of a 0.25% rate hike, compared to a 3.75% differential, is almost negligible.

The market has interpreted BOJ Governor Ueda Kazuo’s signals inversely: he emphasized “economic recovery” but refused to commit to a rate hike path, which Wall Street perceives as a possible delay until mid-2026. The conclusion is—arbitrageurs are choosing to stay put or even increase their positions.

Cryptocurrencies and US Treasuries: Double Warnings of Liquidity Tightening

Bitcoin as a Market Sentiment Indicator

Unlike the calm in stock markets, cryptocurrencies are most sensitive to liquidity. Bitcoin quickly declined from its pre-hike highs and is currently fluctuating around $91,930, with a intraday drop of 2.21%. Historically, after each BOJ rate hike, Bitcoin has experienced 20%-30% swings. If this pattern repeats, the next support level for crypto assets will be around $70,000.

This is not just talk—when yen carry trades start to unwind significantly, the first asset class to see liquidity withdrawal is the riskiest. Bitcoin’s performance actually reflects institutional investors’ risk sentiment shifts.

US Bond Market Reveals Deeper Crisis

Even more concerning is the US bond market. After the rate hike, Japanese institutional investors—one of the largest holders of US Treasuries globally—are facing the temptation of “yen repatriation.” The US 10-year Treasury yield jumped to 4.14% on the day of the hike, creating a so-called “bear steepening.”

What does this mean? The rise in long-term yields is not due to overheating economy and inflation expectations but because traditional buyers (Japanese institutions) are reducing demand. This directly increases the cost of financing for US companies and exerts hidden pressure on the 2026 US stock valuations—especially for high P/E tech firms relying on cheap financing.

The 2026 Speed Race: Three Critical Points

By 2026, the global markets will be driven by a core question: Will the Fed cut rates faster than the BOJ hikes?

Scenario 1: The Fed gently cuts rates, the BOJ pauses hikes
Interest rate spreads widen, yen carry trade prospers, USD/JPY stays above 150, benefiting global risk assets.

Scenario 2: US inflation rebounds, Japan’s inflation spirals out of control
Interest spreads narrow rapidly, $500 billion in carry trades flee in a stampede, yen surges to 130, and global risk assets face systemic adjustments.

Currently, market pricing fully favors Scenario 1—this is the fundamental reason why the yen depreciates despite rate hikes. However, Goldman Sachs warns that if USD/JPY falls below the psychological level of 160, the Japanese government is highly likely to intervene in the forex market, and the resulting volatility could trigger the first wave of deleveraging.

Three Defensive Lines Investors Must Guard

First: USD/JPY 160 threshold
This is the red line for Japanese government intervention. Once reached, policy uncertainty spikes. Do not blindly short the yen.

Second: Bitcoin at $85,000 support
Falling below this level indicates institutional investors are withdrawing liquidity from the riskiest assets—usually a precursor to a risk-averse cycle, which will subsequently impact the entire tech sector.

Third: US Treasury real yields trend
As financing costs rise, funds will rotate from high-valuation tech stocks to defensive sectors like industrials, consumer staples, and healthcare. The speed of this rotation directly reflects market judgment on global liquidity.

For regional investors, the New Taiwan Dollar will face dual shocks from dollar strength and yen unwinding. Companies holding yen-denominated debt or overseas financing should hedge their currency exposure in advance. If global liquidity tightening becomes a reality, high P/E tech stocks will face valuation pressures. In this scenario, high-dividend stocks, utilities, and short-term dollar bond ETFs will stand out as defensive assets.