The Bank of Japan raised interest rates to their highest level in 30 years, yet the yen tumbled to record lows. The government now signals possible currency intervention as the outcome proves opposite of what policymakers intended. And the consequences for Bitcoin might be pretty significant.
What Happened: Rate Hike Fails
On Dec. 19, the BOJ raised its benchmark rate by 0.25 percentage points to 0.75%, the highest level since 1995. The yen moved in the opposite direction instead of strengthening.
Atsushi Mimura, Japan’s vice finance minister for international affairs, warned Monday that recent foreign exchange movements had been “one-sided and sharp.” He added that authorities are prepared to take “appropriate action” if exchange-rate moves become excessive—a clear signal that currency intervention is on the table.
The dollar climbed to 157.67 yen on Monday. The euro reached 184.90 yen, and the Swiss franc touched 198.08 yen, both record lows for the Japanese currency.
Market participants believe Japanese authorities are likely to intervene if the dollar approaches 160 yen. Last summer, the BOJ sold approximately $100 billion at similar levels to prop up the currency.
The rate hike was already fully priced in, triggering a classic “buy the rumor, sell the news” reaction. Investors who had bought yen in anticipation of the rate hike sold to lock in profits once the decision was announced.
Real interest rates remain profoundly negative in Japan. While the nominal rate rose to 0.75%, inflation is running at 2.9%, putting the real interest rate at approximately -2.15%.
In contrast, the United States has a real rate of around 1.44%, with interest rates at 4.14% and inflation at 2.7%. The gap between Japanese and U.S. real rates exceeds 3.5 percentage points, reviving the yen carry trade.
Kazuo Ueda, BOJ governor, offered no clear guidance on the timing of future rate hikes during his Dec. 19 press conference. He emphasized that there was “no predetermined path for further rate hikes” and acknowledged that estimates of the neutral interest rate remain “highly uncertain.”
Robin Brooks, a senior fellow at the Brookings Institution, points to a more fundamental problem. “Japan’s longer-term interest rates are much too low given massive public debt,” he wrote.
Japan’s government debt stands at 240% of gross domestic product, yet its 30-year bond yield is roughly similar to Germany’s—a country with far lower debt levels. The BOJ has been suppressing yields by purchasing massive amounts of government bonds.
Brooks noted that on a real effective exchange rate basis, the yen now rivals the Turkish lira as the world’s weakest currency.
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Why It Matters: Global Volatility
With the yen weakening despite the rate hike, global asset markets are breathing a sigh of relief—for now. In theory, a rate hike should strengthen the currency and trigger unwinding of the carry trade, draining liquidity and pushing down prices of risk assets such as stocks and cryptocurrencies.
But reality is playing out differently. With yen weakness persisting, carry trades have been revived rather than unwound.
Japanese equities are benefiting. The Nikkei rose 1.5% on Monday as a weaker yen boosted earnings for exporters.
Japanese bank stocks have surged 40% year to date, reflecting expectations that higher rates will boost bank profitability. Silver hit a record high of $67.48 per ounce, bringing year-to-date gains to 134%.
However, this relief rests on shaky foundations. If Japanese authorities intervene in the currency market or the BOJ accelerates rate hikes faster than expected, the yen could surge, triggering a rapid unwinding of the carry trade.
The precedent is fresh. In Aug. 2024, when the BOJ raised rates without explicit advance signaling, the Nikkei plunged 12% in a single day, and Bitcoin tumbled alongside it.
Bitcoin has fallen 20-31% following each of the past three BOJ rate hikes. Markets expect dollar-yen to end the year around 155 yen, with thin trading during the Christmas holiday limiting volatility.
ING expects the next BOJ rate hike in Oct. 2026, while Bank of America sees Jun. as more likely—and does not rule out Apr. if the yen weakens rapidly. BofA analysts project the terminal rate will reach 1.5% by the end of 2027.
Brooks warned that “the political consensus for fiscal consolidation does not yet exist. Yen debasement will have to get worse before that happens.”
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AloJapan.com