Why does Japan's interest rate hike policy cause the entire crypto market to fluctuate? Newbie crypto enthusiasts might not have figured out the underlying trick here. Ultimately, the problem lies in the invisible capital chain of "Yen financing arbitrage."

Over the years, Japan has maintained extremely low or even negative interest rates, making the Yen the cheapest borrowing tool in the global financial market. Investment institutions have seized this opportunity: borrowing Yen at nearly zero cost, converting it into USD or other currencies, and then pouring it into Bitcoin and other crypto assets. The benefits of this approach are obvious—earning interest rate differentials while also enjoying the asset appreciation dividends. This model has been running for years, continuously injecting liquidity into the crypto market, and high-leverage trading has grown wildly as a result. Just among Wall Street institutional investors, the funds entering the crypto space through this arbitrage chain have exceeded hundreds of billions of dollars, becoming an important force pushing up coin prices.

The turning point came when the Bank of Japan started raising interest rates. After last year's rate hike to 0.75%, the cost of borrowing Yen suddenly increased, and the arbitrage space was significantly compressed. Even more painfully, if the central bank continues to raise rates, those positions relying on arbitrage will directly turn into losses. By then, investors will only scramble to close their positions, selling crypto assets to buy back Yen and repay loans. The historical data is clear: in March 2024, July 2024, and January 2025, Bitcoin has dropped between 23% and 31% each time after Japan's rate hikes. This chain reaction is caused by the concentrated closing of arbitrage positions. Now that rate hike expectations are rising again, it makes sense that people in the crypto circle are feeling tense.