BOJ Rate Hike Goes Wrong: Why the Yen Crashed and What It Means for Bitcoin

TLDR

• The Bank of Japan raised interest rates to 0.75%, the highest level in 30 years, but the yen fell to record lows against major currencies instead of strengthening.
• Japanese officials warn they may intervene in currency markets if the dollar reaches 160 yen, with the dollar currently at 157.67 yen.
• The rate hike was fully expected by markets, causing a “buy the rumor, sell the news” reaction where investors sold yen to lock in profits.
• Japan’s real interest rate is around -2.15% compared to the US rate of +1.44%, encouraging investors to borrow yen and invest in higher-yielding dollar assets.
• Bitcoin saw a small 1% price increase but experts warn this could be temporary if Japan intervenes to support the yen.

The Bank of Japan raised its benchmark interest rate to 0.75% on December 19, marking the highest level since 1995. The move was supposed to strengthen the yen. Instead, the currency crashed to historic lows against the dollar, euro, and Swiss franc.

The dollar climbed to 157.67 yen on Monday. The euro reached 184.90 yen and the Swiss franc hit 198.08 yen, both record lows for the Japanese currency. The outcome is the opposite of what typically happens when a central bank raises rates.

Atsushi Mimura, Japan’s vice finance minister for international affairs, warned that recent foreign exchange movements were “one-sided and sharp.” He said authorities are prepared to take “appropriate action” if currency moves become excessive. Finance Minister Satsuki Katayama made similar statements last week about responding to speculative currency moves.

Market watchers believe Japanese officials will likely intervene if the dollar approaches 160 yen. Last summer, the BOJ sold roughly $100 billion at similar levels to support the currency. The warnings signal that intervention is now on the table again.

The rate hike failed to boost the yen for several reasons. First, the move was fully priced into markets before it happened. The overnight index swap market had assigned nearly 100% probability to the decision before the BOJ meeting.

This created a classic “buy the rumor, sell the news” scenario. Investors who bought yen expecting the rate hike sold afterward to lock in profits. This selling added downward pressure on the currency right after the announcement.

Interest Rate Gap Drives Yen Weakness

Japan’s real interest rate remains deeply negative despite the increase. With the nominal rate at 0.75% and inflation running at 2.9%, the real rate sits at approximately -2.15%. The US real rate is around +1.44%, with interest rates at 4.14% and inflation at 2.7%.

This gap of more than 3.5 percentage points between Japanese and US real rates has revived the yen carry trade. In this strategy, investors borrow money in Japan at low rates and invest it in higher-yielding US assets. They profit from the interest rate difference while the yen stays weak.

BOJ Governor Kazuo Ueda’s press conference after the rate decision disappointed markets. He offered no clear timeline for future rate hikes. Ueda emphasized there was “no predetermined path for further rate hikes” and said estimates of the neutral interest rate remain “highly uncertain.”

He downplayed reaching the highest rate in 30 years, saying it “has no special meaning.” Markets took this as a signal the BOJ is not rushing to raise rates further. The yen sold off more sharply after his comments.

Debt Burden Limits Policy Options

Robin Brooks, a senior fellow at the Brookings Institution, pointed to Japan’s structural challenges. He said Japan’s longer-term interest rates are too low given the country’s massive public debt. Japan’s government debt stands at 240% of GDP, yet its 30-year bond yield is similar to Germany’s, which has far lower debt.

The BOJ has kept yields artificially low by buying huge amounts of government bonds. Brooks explained that without this buying, Japan’s longer-term yields would be much higher and could trigger a debt crisis. He said the country faces a choice “between a debt crisis and currency debasement.”

Prime Minister Sanae Takaichi has pushed aggressive fiscal expansion since taking office in October. This is Japan’s largest stimulus package since the COVID-19 pandemic. With debt already at 240% of GDP, markets worry that looser fiscal policy undermines the BOJ’s efforts to stabilize the currency.

Bitcoin saw a marginal 1.04% increase to $88,949 following the yen’s decline. However, crypto analysts view this as potentially temporary. If Japanese authorities intervene to support the yen, it could negatively impact Bitcoin’s price by unwinding carry trades and draining liquidity from risk assets.

Bitcoin has fallen 20-31% following each of the past three BOJ rate hikes. In August 2024, when the BOJ raised rates without clear advance warning, the Nikkei plunged 12% in one day and Bitcoin dropped alongside it. The current calm rests on uncertain foundations.

Markets expect the dollar-yen exchange rate to end the year around 155 yen. If the pair breaks above 158 yen, it could test this year’s high of 158.88 yen and potentially last year’s peak of 161.96 yen. The risk of Japanese intervention increases sharply as the rate approaches 160 yen.

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