#BOJRateHikesBackontheTable

Yen Liquidity Shifts & Crypto Risk: JPMorgan’s BOJ Rate Hike Outlook, Carry Trades, and What It Means for Bitcoin and Markets

JPMorgan’s expectation that the Bank of Japan (BOJ) will raise interest rates multiple times in 2025 and take policy rates toward around 1.25% by the end of 2026 signals a major shift in global monetary dynamics after decades of ultra‑low rates in Japan. This anticipated tightening has significant implications not just for currency markets, but for liquidity conditions, risk appetite, and global capital flows—including how investors allocate to crypto assets like Bitcoin.
Traditionally, the Japanese yen has been a cornerstone of the global carry trade—a strategy where investors borrow cheap yen and convert it into higher-yield currencies or assets to earn the interest rate differential. Because Japanese interest rates were historically near zero or negative for years, borrowing yen was extremely cheap. Traders used this cheap funding to take leveraged positions in risk assets such as equities, bonds, commodities, and cryptocurrencies. As long as yen funding costs remained low, this “carry” mechanism acted as a source of global liquidity and speculative capital.
However, with the BOJ pivoting toward policy normalization raising rates and potentially continuing this path—the economics of borrowing yen change. Higher Japanese rates narrow the interest rate differential that made carry trades attractive in the first place. As governance shifts toward higher yields, the incentive to borrow yen and pile into risk assets diminishes, and in many cases carries may begin to unwind. This unwind process forces traders and institutions to sell assets that were bought with cheap yen funding in order to repay yen-denominated debt, which can create systemic selling pressure across markets.
In global markets, one of the largest effects of this potential shift is on liquidity availability. The yen carry trade has acted as a major driver of global capital flows for decades. As positions unwind, capital may be repatriated back to Japan or used to cover rising funding costs, reducing the amount of money chasing higher-risk assets. This tighter liquidity could weigh on markets that thrived on cheap funding, including Bitcoin and other cryptocurrencies. Analysts have already noted that BOJ tightening expectations have coincided with crypto volatility and sell-offs, as leveraged positions are forced to adjust and traders de-risk to reduce exposure.
A core question for crypto markets is whether this dynamic could trigger a significant unwinding of the yen carry trade and tighten risk liquidity. Multiple market reports indicate that such a scenario is not just theoretical as rising yields and yen strength (or the threat thereof) make carry trades less profitable, investors may begin closing out positions. This process has historically drained liquidity from global markets and can lead to heightened volatility and price pressure on risk-on assets such as BTC and major altcoins. Even if much of the potential tightening has been priced in by markets already, the actual unwind can still introduce measured deleveraging that plays out over time.
For Bitcoin specifically, the landscape is nuanced. Some narratives suggest that as carry trades unwind, crypto liquidity contracts and BTC can face headwinds if capital rotates out of risk assets to cover funding costs or reduce leverage. Others argue that markets may have already priced in expected BOJ actions, meaning the direct price impact could be muted if rate adjustments happen gradually and without sudden shocks. In some instances, even if yen-carry positions unwind, the liquidity environment shaped by other central banks—like the U.S. Federal Reserve could offset or complicate these effects, depending on rate differentials and macro policy coordination globally.
Additionally, the behavior of the yen itself matters. Recent market dynamics show the yen trading at prolonged lows against major currencies despite BOJ rate hikes, complicating the carry unwind narrative. Japanese officials have even signaled potential actions to address excessive currency moves, underscoring how monetary policy, exchange rates, and macro risk perceptions are tightly interwoven at this stage.
In summary:
Yen liquidity shifts are real and carry trade dynamics are a key part of global funding conditions. As the BOJ tightens, the profitability of yen borrowing shrinks, potentially triggering unwinding behavior among leveraged investors.
Crypto markets are sensitive to shifts in global liquidity when easy funding dissipates, assets like Bitcoin may face episodic volatility or downward pressure if risk appetite wanes.
Whether this effect becomes a major headwind or a slower structural adjustment depends on how smoothly the BOJ’s rate normalization unfolds, how other central banks act, and how investor behavior adapts to shifting global yield landscapes.
The carry unwind process can influence risk allocation by pushing capital out of high-beta assets into safer positions or into less-correlated stores of value, dampening speculative flows that once buoyed crypto markets.
In conclusion, the expected BOJ rate hikes and the potential for a yen carry trade unwind represent a meaningful macro factor that could reshape risk asset behavior, including crypto allocations. Traders and investors should watch yen strength, global liquidity indicators, and evolving funding cost dynamics because these broader trends may ripple through crypto markets in profound ways over the next several quarters.