Japan's Bank of Japan raises interest rate probability to 98%! Bitcoin's historic 20% drop curse reappears?

The Bank of Japan is scheduled to hold a policy meeting from December 18 to 19. Polymarket prediction markets give a 98% probability of rate hikes, with only 2% believing rates will remain unchanged. The market expects the BOJ to raise interest rates by 25 basis points to 0.75%, reaching the highest level in nearly 20 years. Analysts warn that if history repeats itself, Bitcoin could drop below the $70,000 mark, with the wave of yen arbitrage position unwinding being the core threat.

Market Panic Behind the 98% Rate Hike Probability

(Source: Polymarket)

Polymarket prediction markets currently assign a 98% chance of a rate hike by the Bank of Japan, and such extreme consensus expectations are themselves a warning sign. When the market’s expectation for an event is highly uniform, it often means that the expectation has already been fully reflected in prices, but it also leaves room for “expectation gaps.” If the BOJ indeed hikes rates as expected, the market may experience a “sell the news” rebound; however, if the policy statement is more hawkish than anticipated, it could trigger additional sell-offs.

The market expects the BOJ to raise rates by 25 basis points, lifting the policy rate to 0.75%, the highest in nearly 20 years. While this rate remains relatively low compared to other major central banks, it is highly significant for Japan, which has long pursued ultra-loose monetary policy. This marks Japan’s official departure from negative and zero interest rate era, returning to normalization of monetary policy.

BOJ Governor Ueda Kazuo’s statements are key to fueling expectations of a rate hike. He hinted that inflation has remained above the 2% target for over three consecutive years, providing ample justification for a rate increase. A Reuters report on Friday indicated that markets have largely priced in the expectation of raising the rate to 0.75%. However, the report also pointed out that even with such measures, Japan’s borrowing costs will remain relatively low by global standards, but the BOJ may emphasize that the monetary environment will stay accommodative, with future hikes depending on economic responses to each rate increase.

Global financial markets are visibly heating up, especially the cryptocurrency market. Bitcoin is seen as one of the most vulnerable risk assets to be impacted this week, with the market generally believing that a rate hike by the BOJ is almost certain. This policy shift could become a key factor influencing market trends around the end of the year.

Chain Reaction of Yen Arbitrage Position Unwinding

Japan has long been a major source of low-cost capital worldwide. For decades, institutional investors have borrowed yen at extremely low interest rates and invested the funds in global stocks, bonds, and cryptocurrencies, forming what is known as yen arbitrage trading. However, as Japanese bond yields rise, the attractiveness of such trades is waning, and market structures are beginning to change.

The direct effect of a rate hike by the BOJ is to push up borrowing costs. When the yen interest rate rises from near zero to 0.75%, the profit margin for arbitrage trading is compressed. More importantly, rate hikes often lead to yen appreciation, which can cause currency losses. For example, if an institution borrows 100 yen to invest in Bitcoin, and the yen appreciates by 5% against the dollar, even if Bitcoin’s price remains unchanged, they will need to pay an extra 5% in exchange costs at repayment. This dual pressure forces institutions to unwind their positions.

Triple Blow to Bitcoin from BOJ Rate Hike

Rising Borrowing Costs: Yen interest rate from near zero to 0.75% directly compresses arbitrage profit margins

Currency Loss Risk: Rate hikes strengthen the yen, forcing institutions to face currency losses at repayment, prompting early liquidation

Global Liquidity Tightening: Repatriation of Japanese capital reduces liquidity in global risk assets, with cryptocurrencies bearing the brunt

Expectations of policy tightening have raised concerns about potential impacts of yen arbitrage unwinding, which is a significant source of liquidity for global risk assets, including cryptocurrencies. Some analysts warn that if yields continue to climb, leveraged positions built on yen financing in the past may be forced to close. This would lead investors to sell risk assets to repay loans, and Bitcoin, being highly sensitive to liquidity, would likely be among the first to suffer.

The Historic Law: Bitcoin Must Drop After Three Rate Hikes

(Source: Merlijn The Trader)

Market concerns stem from past experiences. Reviewing previous rate hikes by the BOJ, Bitcoin prices have all experienced significant corrections. After the March 2024 rate hike, Bitcoin fell by about 23%, after another hike in July 2024, it declined approximately 25%, and following the January 2025 hike, the price once dipped over 30%. These historical patterns make investors especially cautious ahead of this week’s policy meeting.

Some traders believe that a strong correlation has formed between BOJ rate hikes and Bitcoin declines. Analysts warn that if history repeats, Bitcoin could rapidly plunge after the policy announcement, even breaking below the $70,000 level, roughly a 20% decrease from current levels. Recently, Bitcoin has fallen below the psychological $90,000 mark, indicating a more cautious market sentiment.

However, not all voices are bearish. Macro analyst Quantum Ascend offers a different perspective, suggesting that if BOJ hikes and the Fed cuts rates simultaneously, it could be bullish for cryptocurrencies in the medium to long term. In such a scenario, Fed rate cuts would help release dollar liquidity, while gradual BOJ rate hikes could strengthen the yen without triggering a global liquidity crunch. This view sees capital shifting toward risk assets with asymmetric upside potential.