Japan’s Rate Goes Wrong: Yen Sinks—What It Means for Bitcoin

The Bank of Japan raised interest rates to the highest level in 30 years, but the yen hit a record low. The result is the exact opposite of what Japan intended.

With the government now showing the possibility of intervening in the currency market, uncertainty is growing.

Japan warns of “appropriate action” as Yen slides.

On Monday, Atushi Mimura, Japan's vice finance minister for international affairs and the country's top currency diplomat, warned that recent foreign exchange movements had been “one-sided and sharp”. Authorities have said they are ready to take “appropriate action” if foreign exchange rate movements go too far – a clear sign monetary intervention is on the table. Finance Minister Satsuki Katayama made similar comments late last week, saying Tokyo would respond appropriately to excessive and speculative currency movements.

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The warning comes as the yen hits historic lows. The dollar rose to 157.67 yen on Monday. The euro hit 184.90 yen, and the Swiss franc touched 198.08 yen, both lows against the Japanese currency. Market participants believe Japanese authorities may intervene as the dollar nears 160 yen. Last summer, the BOJ sold nearly $100 billion at the same level to raise funds.

Why is it weakening despite the rise in prices?

Under normal circumstances, raising interest rates strengthens the currency. Higher rates attract foreign capital seeking better returns. On December 19, the BOJ raised its benchmark rate by 0.25 percentage points to 0.75%, the highest level since 1995.

However, the yen has moved in the opposite direction. They explain this paradox.

First of all, the price hike was already completely sold out. The overnight index swap market had assigned almost 100% leverage before the meeting. This provoked the common reaction of “buy the rumor, sell the news.” After the decision was announced, investors who had bought the yen in anticipation of a sell-off to lock in profits added to downward pressure on the currency.

Second, real interest rates are very negative in Japan. Inflation rose to 0.75 percent, while inflation reached 2.9 percent. This puts the real interest rate—minus nominal inflation—at about -2.15 percent. In contrast, the US has a real rate of around +1.44%, interest rates at 4.14% and inflation at 2.7%, the gap between Japan and the US is over 3.5%.

This wide variation has revived the yen's carry trade. In commodity trading, investors borrow money in a country with low interest rates and invest elsewhere with higher yields. By borrowing against the cheap yen and investing in dollar assets, traders pocket the difference in yields. Investors are once again selling yen and buying dollars, as the real rate differential still heavily favors the dollar.

Third, BOJ Governor Kazuo Ueda's press conference disappointed markets. Speaking on December 19, Yuda gave no clear guidance on the timing of future rate hikes. They stressed that there was “no pre-determined path to further rate hikes” and acknowledged that neutral interest rate estimates were “highly uncertain”. He downplayed the significance of the decision, saying that reaching the highest level in 30 years was “not particularly meaningful”. Markets interpreted this as a sign that the BOJ was in no rush to tighten further and that yen selling had increased.

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Japan's structural problem

Robin Brooks, a senior fellow at the Brookings Institution, points to a more fundamental problem. “Japan's long-term interest rates are very low given its huge public debt,” he wrote. “As long as that is true, the yen will continue its depreciating cycle.”

Japan's government debt is 240% of GDP, but the 30-year bond yields the same as Germany – a country with a very low debt ratio. This is unusual. The BOJ has been stifling yields by buying large amounts of government bonds.

“Without this purchase, Japan's long-term yields would be too high, pushing the country into a debt crisis,” Brooks explained. Unfortunately, given how large Japan's debt burden is, the choice is between a debt crisis and a currency collapse.

According to Brooks, based on the real effective exchange rate, the yen is now the world's weakest currency, rivaling the Turkish lira.

Adding to the pressure, Prime Minister Sanai Takaichi has pursued aggressive fiscal expansion since taking office in October. This is Japan's largest stimulus package since the Covid-19 pandemic. With government debt at 240% of GDP, markets are concerned that loose fiscal policy could undermine the BOJ's efforts to stabilize the currency.

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Market impact: short-term relief, increasing uncertainty

Global property markets are heaving a sigh of relief as the yen continues to weaken despite the price hike – for now.

In theory, rising prices should strengthen the currency and reverse the carry trade. As investors rush to pay off yen-denominated loans, they are selling global assets, draining liquidity and pushing up the value of risk assets such as stocks and cryptocurrencies.

But the reality is playing out differently. As the yen continues to weaken, carry trades have been revived rather than wounded.

Japanese stocks benefit. The Nikkei rose 1.5 percent on Monday as a weaker yen boosted earnings at exporters such as Toyota, as overseas earnings are converted into yen. Shares of Japanese banks are up 40% year to date, reflecting expectations that higher rates will boost bank profitability.

They are also collecting safe assets. Silver hit a record high of $67.48 an ounce, a 134 percent gain year-to-date. Gold remains firm at $4,362 an ounce.

However, this relief rests on shaky foundations. It is “uncertain stability” created by the BOJ's lack of clear policy guidance. If Japanese authorities intervene in the currency market or the BOJ accelerates rate hikes more than expected, the yen could rise. That would lead to a faster unwinding of a carried trade, which could drag down global assets.

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The condition is hot. In the year In August 2024, the Nikkei fell 12% in one day, and Bitcoin fell alongside it, when the BOJ raised rates without a clear advance signal. Bitcoin has fallen 20-31% since the last three BOJ rate hikes.

View: 160 yen is the line in the sand.

In the near term, markets expect the dollar-yen to end the year at around 155 yen, with thin trading during the Christmas period limiting volatility.

However, if the pair breaks above 158 yen, it could test this year's high of 158.88 yen and last year's high of 161.96 yen. As the rate approaches 160 yen, the likelihood of Japanese intervention increases significantly.

Predictions for the next BOJ rate hike are divided. ING expects a move in October 2026, while Bank of America sees June as more likely – and won't rule out April if the yen weakens rapidly. BofA analysts expect the terminal rate to reach 1.5% by the end of 2027.

However, some analysts warn that even these predictions may not be enough. With US rates still above 3.5% and the BOJ at just 0.75%, the interest rate gap is too wide for the yen to recover meaningfully. Arresting the yen's decline would require the BOJ to hike slightly to 1.25-1.5%, combined with further Fed rate cuts – an unlikely scenario in the near term.

Japan finds itself walking a tightrope between a currency collapse and a debt crisis. “There is still no consensus on the politics of fiscal consolidation,” Brooks warned. Before that happens, the yen's debasement will only get worse.

Global markets should be alert to Japan-led volatility in the coming months.