Bank of Japan Governor Kazuo Ueda delivered a clear message in his first public appearance of 2026. He emphasized that the monetary tightening cycle is not yet over.
This statement was made about two weeks after the Bank of Japan raised the policy interest rate to 0.75% on December 19. This is the highest level since 1995. However, this decision was overshadowed by ambiguous prospects for future rate hikes from Governor Ueda, disappointing the market and causing the yen to hit record lows against the euro and Swiss franc. It is believed that the New Year's remarks aimed to correct such market perceptions.
Bond market reaction
Governor Ueda stated at the New Year gathering hosted by the Bank of Japan Association: 'We will continue raising rates in response to improvements in the economy and inflation. A proper adjustment of monetary easing will lead to achieving stable price targets and long-term economic growth.'
Ahead of Governor Ueda's speech, Japan's 10-year government bond yields continued to rise, reaching their highest level since 1999. This movement indicates growing market expectations for further rate hikes.
Many Bank of Japan watchers expect the next rate hike around mid-2026, but analysts note that if yen depreciation continues, it could be brought forward. At noon in Tokyo, the yen was trading around 157.15 per dollar, approaching the 160 yen level, which market participants view as a trigger for government intervention.
Last summer, Japanese authorities sold about 1 trillion yen in currency defense at a similar level. Deputy Finance Minister Atsushi Muraoka warned last month that appropriate measures would be taken against excessive exchange rate fluctuations.
latent structural risks
Even the Bank of Japan itself acknowledged in late December that Japan's real policy rate remains exceptionally low compared to the rest of the world. Although rates have risen to 0.75%, with inflation persisting at 2.9%, real interest rates remain extremely low at approximately minus 2.15%. The central bank stated that there is still considerable distance to reach a neutral interest rate level and hinted at the potential for an additional 100 to 175 basis points of rate hikes.
Signs of strain are already emerging in Japan's financial system. Chuo Bank reported a loss of $12.6 billion and was forced to sell foreign bonds worth $63 billion. Regional banks collectively hold unrealized losses of approximately 330 billion yen, a 260% increase compared to March 2024. Declining bond prices are pressuring asset values.
As a symbolic turning point, at the end of last year, Germany surpassed Japan to become the world's largest creditor nationâa reversal after 34 years. This highlights the shift from Japan, once a major source of global capital, to now experiencing a reversal of capital outflows.
Impact on Bitcoin
For the cryptocurrency market, the Bank of Japan's hawkish stance has reignited familiar concerns. In each of the last three BoJ rate hike cycles, Bitcoin prices dropped by 20% to 31%. The unwinding of the yen carry trade absorbs liquidity from global risk assets.
The mechanism is straightforward. For decades, investors have borrowed yen at ultra-low interest rates and invested in higher-yielding assets, including cryptocurrencies. As Japanese interest rates rise, the profitability of this trade diminishes, leading to position unwinding across the entire market.
The flash crash in August 2024 vividly illustrated what can happen when carry trades are abruptly unwound. When the Bank of Japan unexpectedly raised interest rates, the Nikkei average plummeted 12% in a single day, and Bitcoin also declined simultaneously.
At present, the market's reaction to Governor Ueda's remarks has been limited; investors are focusing more on concrete actions than words. As long as the yen continues to weaken and the real interest rate differential remains favorable to the dollar (currently over 3.5 percentage points), carry trades are expected to continue for the foreseeable future.
Outlook for the future
The Bank of Japan's next policy decision is on January 23. If further rate hikes or additional tightening are signaled, the yen could rapidly appreciate, leading to an expected unwinding of carry trades that have historically pressured the cryptocurrency market.
Conversely, if policy uncertainty continues, the current unstable calm may persist for longer. However, in that case, yen depreciation would accelerate, increasing the risk of foreign exchange intervention.
In any case, cryptocurrency traders must remain vigilant toward Japan-driven market movements over the coming weeks. As Robin Brooks of the Brookings Institution notes, Japan is walking a tightrope between currency devaluation and debt crisis. The outcome of this balancing act could have far-reaching consequences beyond Tokyo.
