🇯🇵 Yen Liquidity, BOJ Rate Hikes, and Crypto Risk Is the Carry Trade Back in Focus?

JPMorgan’s expectation that the Bank of Japan could hike rates twice in 2025, pushing policy rates toward 1.25% by end-2026, is more than a local monetary policy story. It directly raises questions about global liquidity conditions, risk asset funding, and whether a yen carry trade unwind could once again ripple through markets including crypto. My view is that yen liquidity still matters, but the impact will be conditional, not automatic.
Why the Yen Matters to Global Risk Assets
For decades, the yen has functioned as one of the world’s cheapest funding currencies. Ultra-low Japanese rates enabled global investors to borrow yen and deploy capital into higher-yielding or higher-beta assets across equities, credit, emerging markets, and crypto. This carry dynamic doesn’t operate in headlines; it operates quietly through balance sheets and funding desks. When yen funding is abundant and cheap, global risk tolerance rises. When that funding tightens, risk appetite contracts often abruptly. My advice is to treat yen liquidity as a background liquidity tide, not a direct trigger.
What BOJ Rate Hikes Actually Signal
The significance of potential BOJ hikes is not the absolute level of rates, but the directional shift. Japan moving from negative and near-zero rates toward a normalized policy regime signals the end of a multi-decade anomaly. That transition alters investor psychology, hedging costs, and funding assumptions. However, even at 1.25%, yen rates would still be low by global standards. This suggests that the BOJ is tightening slowly and deliberately, aiming to reduce distortions without causing systemic stress. My advice is to distinguish between normalization and tightening shock the former is manageable, the latter is destabilizing.
Is a Yen Carry Trade Unwind Back in Play?
A carry unwind becomes dangerous only when three conditions align: rising funding costs, currency appreciation, and forced deleveraging. Rate hikes alone are not enough. For a meaningful unwind, the yen must strengthen materially and persistently, increasing repayment costs for leveraged positions. At present, gradual BOJ hikes do not automatically imply a violent yen surge. Without sharp currency appreciation or sudden policy acceleration, carry trades tend to adjust, not implode. My advice is to watch the yen’s trend and volatility, not just BOJ rhetoric.
Implications for Crypto Risk Allocation
Crypto is sensitive to marginal liquidity, not just headline policy rates. If yen funding tightens at the margin, global risk allocation could become more selective, especially for highly leveraged or speculative crypto exposures. That does not necessarily mean capital exits crypto entirely it often rotates toward higher-quality, more liquid assets within the space, such as Bitcoin. Historically, liquidity contractions tend to punish long-tail tokens first, not core assets. My advice is to expect dispersion, not uniform selling, if yen liquidity tightens gradually.
Why Bitcoin Reacts Differently Than Other Risk Assets
Bitcoin sits at a unique intersection of risk asset and monetary hedge. During periods of tightening liquidity, it can initially trade like a high-beta risk asset, but it often stabilizes faster than speculative alternatives. If yen liquidity tightens modestly, Bitcoin may underperform equities temporarily, but it is unlikely to face structural pressure unless global liquidity broadly contracts. My advice is to monitor whether Bitcoin’s drawdowns are shallower than those of high-beta assets that relative strength often signals resilience.
The Bigger Picture: Global Liquidity Is Still Multi-Polar
Even if Japan tightens, global liquidity does not hinge on a single central bank. The Federal Reserve, ECB, and PBOC all influence liquidity conditions simultaneously. A gradual BOJ normalization could be offset by easing elsewhere, limiting net tightening. Markets tend to overestimate the impact of one central bank in isolation. My advice is to evaluate yen developments in context alongside dollar liquidity, credit spreads, and global growth conditions.
What I Am Watching Closely
I am not reacting to forecasts alone. I am watching whether yen volatility rises, whether funding spreads widen, and whether leveraged risk assets show stress behavior rather than orderly repricing. If the yen strengthens sharply and risk assets simultaneously deleverage, that would suggest carry pressure. Absent that alignment, BOJ hikes remain a slow-burn macro influence, not an immediate threat. My advice is to remain observant, not reactive.
Final Advice How I Am Positioning Conceptually
BOJ rate hikes are a reminder that the era of free global liquidity is ending gradually, not abruptly. Yen carry dynamics still matter, but they are no longer the singular driver they once were. I am not positioning for a disorderly carry unwind, but I am adjusting expectations for leverage and risk dispersion. In crypto, that means prioritizing liquidity, quality, and risk control over aggressive yield chasing.
The yen is no longer asleep but it is not roaring either. Markets that respect that nuance will navigate this phase more effectively than those chasing extremes.
‍#BOJRateHikesBackontheTable