Understanding why Bitcoin drops whenever the Bank of Japan raises interest rates? The core logic is actually quite simple.

For many years, Japan's interest rates have been extremely low. Global investors borrowed yen as "zero-interest loans," converted them into USD to buy US stocks, US bonds, and high-yield assets like BTC. The key to this strategy is— as long as the yen remains low-interest, borrowing costs are nearly zero, and arbitrage opportunities persist.

But once the Bank of Japan decides to raise interest rates, the game changes. The cost of borrowing yen suddenly increases, and those profitable arbitrage trades instantly lose their edge. Even more painfully, investors, in order to repay yen loans or simply avoid further losses, will sell off their BTC, US stocks, and other assets to convert back into yen to pay off debts. This wave of selling creates significant downward pressure in the market.

Historical data shows this pattern clearly—
After the March 2024 rate hike, Bitcoin dropped about 27%
After the July 2024 rate hike, BTC fell another approximately 30%
In January 2025, with another rate hike, it declined roughly 30% again

Now, on December 19, 2025, the Bank of Japan announced an interest rate hike to 0.75%. Market reactions are mixed. Pessimists say that rate hikes will lead to global liquidity tightening, and the pressure to unwind arbitrage positions will continue. Some even worry that the Bank of Japan might initiate a new tightening cycle or sell large amounts of ETF holdings next year, which could long-term dampen liquidity.

Simply put: this rate hike signal might not just be a short-term shock; many are pondering whether the Bank of Japan will continue to act in the near future.