Author: Zhou, ChainCatcher
At the monetary policy meeting concluding on December 19, 2025, the Bank of Japan (BOJ) decided to raise the policy rate by 25 basis points, from 0.5% to 0.75%. This marks the second rate hike since January this year, bringing interest rates to their highest level since 1995.
The decision was passed unanimously with a 9:0 vote, fully in line with market expectations. All 50 economists surveyed had predicted this rate hike, making it the first unanimous expectation for a hike under Governor Kazuo Ueda's tenure.
At a press conference, BOJ Governor Kazuo Ueda stated that short-term interest rates being at a 30-year high holds no special significance and that the central bank will closely monitor the impact of interest rate changes. He mentioned that there is still some distance to the lower bound of the neutral interest rate range and that the market should not expect a precise neutral interest rate range to be provided in the short term. The pace of future adjustments to monetary support policies will depend on economic growth, price performance, and financial market conditions at the time.
Ueda emphasized that the BOJ will update its assessments of the economic outlook, price risks, and the likelihood of achieving targets at each meeting and make decisions accordingly. He acknowledged that estimates for Japan's neutral interest rate span a wide range, making precise calculations difficult, and that it is necessary to observe the actual feedback from the economy and prices after each interest rate change. If wage increases continue to translate into price rises, further rate hikes are indeed possible.
Capital markets reacted relatively calmly: The USD/JPY exchange rate rose slightly by 0.3% to 156.06; the yield on Japan's 30-year government bonds edged up 1 basis point to 3.385%; the Nikkei 225 index rose 1.5% during the session to 49,737.92 points; and Bitcoin surpassed $87,000, with a daily increase of 1.6%. Risk assets, as a whole, did not show significant selling pressure for the time being.
Looking back at the fundamentals, this rate hike by Japan was well-supported by data. In November, core CPI grew by 3.0% year-on-year, in line with expectations, indicating that inflationary pressures remain strong and have now exceeded the 2% policy target for 44 consecutive months. Additionally, wage growth momentum is solid, large manufacturers' confidence has reached a four-year high, and even amid U.S. tariff pressures, corporate supply chain adjustments have shown significant resilience, with the impact being lower than expected.
Meanwhile, Japan's major labor unions have set wage hike targets for the upcoming "Shunto" spring wage negotiations that are on par with last year's. Given that last year saw the largest wage increases in decades, this suggests that wage growth momentum continues.
Overall, although the rate hike was small, it marks Japan's formal departure from the long era of ultra-loose monetary policy and could become a significant turning point for global risk asset liquidity at year-end.
Has the Market Fully Priced In Expectations?
Current market pricing suggests that the Bank of Japan may raise rates again as early as June or July next year. Yuxuan Tang of J.P. Morgan Private Bank believes that, due to full market expectations, the rate hike's boost to the yen will be limited. It is expected that there will be one more rate hike in 2026, bringing the rate to 1%, with USD/JPY fundamentals remaining high around 150, with 160-162 as a potential defense range. Negative interest rate differentials and fiscal risks will continue to limit the yen's appreciation potential.
However, some analysts question this timeline as too aggressive, suggesting that October 2026 is a more realistic window, as it would allow sufficient time to assess the impact of rising borrowing costs on corporate financing, bank credit, and household consumption. By then, the results of the spring wage negotiations and the yen exchange rate will be the core evaluation indicators.
Additionally, Morgan Stanley expects that after the 25 basis point hike, the BOJ will still emphasize the accommodative nature of the policy environment, with interest rates still below neutral levels. The future tightening path will be gradual and highly data-driven, without a preset aggressive route.
Investinglive analyst Eamonn Sheridan believes that since real interest rates remain negative and policy is generally accommodative, the next rate hike is expected no earlier than mid-to-late 2026 to observe the actual penetration of borrowing costs into the economy.
For a long time, Japan's ultra-low interest rate environment has provided vast amounts of cheap liquidity to global markets. Through the "yen carry trade," investors borrow yen at low cost and invest in high-yield assets such as U.S. stocks and cryptocurrencies. This mechanism, on a massive scale, has been a key support for the risk asset bull market over the past years.
Although the latest TIC data show that Japanese capital has not yet seen large-scale repatriation from the U.S. Treasury market (holdings increased to $1.2 trillion in October), as the attractiveness of Japanese Government Bonds (JGBs) rises, this trend may gradually emerge, pushing up U.S. Treasury yields and global dollar funding costs, thereby putting pressure on risk assets.
Currently, most major central banks are in a rate-cutting cycle, while the BOJ's rate hike creates a policy divergence. This contrast is highly likely to trigger unwinding of carry trades, and the cryptocurrency market, with its high leverage and 24-hour trading characteristics, is often the first to feel the liquidity shock.
Macro analysts had warned that if the BOJ hiked rates on December 19, Bitcoin could face a risk of retesting $70,000. Historical data show that Bitcoin experienced significant pullbacks after the past three rate hikes, typically falling 20%-30% within 4-6 weeks. For example, it fell 23% in March 2024, 26% in July, and 31% in January 2025. The market was highly concerned that this hike would repeat this historical pattern.
Those sounding the alarm believe that Japan's rate hike remains one of the biggest variables in current asset pricing, and its role in global capital markets is underestimated. A policy shift could trigger broad deleveraging effects.
A more neutral view holds that attributing historical declines solely to Japan's rate hikes is overly simplistic, and that expectations for this hike were extremely well-anticipated (the crypto market had already corrected in advance since last week). Most panic sentiment has been priced in. Analysts note that the market fears uncertainty more than tightening itself.
It is worth mentioning that, according to Bloomberg, the BOJ may begin the gradual liquidation of its ETF assets as early as January 2026. As of the end of September, its ETF holdings were valued at approximately 83 trillion yen. If accompanied by multiple rate hikes in 2026, bond selling could accelerate. The continued unwinding of the yen carry trade would trigger risk asset sell-offs and yen repatriation, having a profound impact on stock markets and cryptocurrencies.
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