#BOJRateHikesBackontheTable

BOJ Rate Hikes Return to the Agenda: Yen Carry Trade Unwind and Its Impact on Crypto Markets

JPMorgan 2025–2026 Outlook

JPMorgan expects the Bank of Japan to raise interest rates twice in 2025, lifting the policy rate to around 1.25 percent by the end of 2026. This outlook reflects persistent inflation pressures and suggests that changes in yen liquidity could continue to influence global risk assets.

BOJ’s December 2025 Decision

On December 19, 2025, the BOJ raised its policy rate by 25 basis points to 0.75 percent, the highest level since 1995. The decision was unanimous. Governor Kazuo Ueda signaled that further hikes are possible if the wage growth cycle continues. Despite the move, real interest rates remain in negative territory.

What Is the Yen Carry Trade and Why Is It Unwinding

The yen carry trade involves borrowing yen at low interest rates and investing in higher-yielding assets such as equities, bonds, and crypto. As the BOJ raises rates, borrowing costs increase and the yen strengthens, forcing investors to unwind positions. This process tightens global liquidity and creates selling pressure on risk assets.

Potential Impact on Crypto Markets

A contraction in yen liquidity reduces capital flows into high-risk assets like crypto. Historical episodes during 2024–2025 showed Bitcoin declines of 15 to 30 percent during carry trade unwinds. Following the late-2025 hike, Bitcoin experienced a short-term pullback of roughly 2 to 8 percent, while leveraged positions faced higher liquidation risk. Over the longer term, potential US rate cuts could help offset some of this pressure.

Outlook for 2026

The BOJ’s terminal rate is expected to fall within the 1.0 to 1.5 percent range. Additional hikes, potentially around mid-2026, could further strengthen the yen and make carry trades more challenging. Crypto investors may need to reassess risk allocation, with hedging strategies and lower leverage advised against liquidity shocks.

Overall Assessment

The renewed focus on BOJ rate hikes highlights how Japan’s policy normalization could affect global markets. While a yen carry trade unwind may not trigger a sudden crash, it can weigh on crypto risk appetite. The year 2026 may bring heightened macro uncertainty, making a cautious approach increasingly important for investors.