Japan's Central Bank raises interest rates for the first time in 30 years! 83 trillion yen ETF liquidation, risk assets face a turning point.

The Bank of Japan passed a rate hike of 25 basis points with a unanimous vote of 9:0, raising the policy interest rate from 0.5% to 0.75%, marking the highest record since 1995 and officially ending a three-decade era of ultra-loose monetary policy. According to Bloomberg, the Bank of Japan is expected to initiate a gradual liquidation of 83 trillion yen ETF holdings as early as January 2026, combined with the unwinding of yen arbitrage trades, as global risk assets face a liquidity turning point.

Three Major Data Supports: Where Does the Bank of Japan's Confidence Come From

The Bank of Japan's recent interest rate hike is not a reckless move, but a normalization of policy supported by solid fundamentals. Core CPI has been above the 2% policy target for 44 consecutive months, with November's core CPI year-on-year increase of 3.0% meeting expectations, indicating persistent inflationary pressures. This sustained inflation demonstrates that the Japanese economy has emerged from a two-decade-long deflationary quagmire, with price increases no longer being a short-term phenomenon but rather a structural transformation.

Wage growth momentum has firmly become the second largest pillar. Japan's major labor unions have set a wage increase target that is in line with last year for the upcoming “Spring Struggle”. Given that last year saw the largest wage adjustment in decades, this indicates that the momentum for wage growth is still ongoing. Rising wages are a key driver of persistent inflation and also the core source of confidence for the Bank of Japan to dare to raise interest rates. Kazuo Ueda clearly stated, “If wage increases continue to be transmitted to prices, a rate hike is indeed possible.”

Corporate confidence has risen to a four-year high, providing a third layer of protection. The large manufacturing confidence index shows that, even under pressure from U.S. tariffs, adjustments in corporate supply chains have demonstrated significant resilience, with impacts lower than expected. This resilience stems from enhanced corporate confidence in the domestic market in Japan and improved cost pass-through capabilities. When companies are willing to invest and dare to raise salaries, the Central Bank has room to tighten monetary policy without stifling economic growth.

Ueda Kazuo emphasized at the press conference that there is still distance from the lower limit of the neutral interest rate range, and future adjustments will depend on economic data, with the tightening pace being gradual and data-dependent. This statement leaves room for speculation in the market and also indicates that 0.75% is not the endpoint.

Yen Arbitrage Trading Deconstruction: Risk Asset Liquidity Turning Point

The real threat of the Bank of Japan raising interest rates does not lie in the 25 basis points itself, but in the gradual deconstruction of “yen arbitrage trades.” For a long time, Japan's ultra-low interest rate environment has provided massive cheap liquidity to global markets. Investors borrow yen at low costs and invest in high-yield assets such as U.S. stocks and cryptocurrencies. This mechanism is large in scale and has been an important support for the bull market in risk assets over the past few years.

As Japan's interest rates rise, the cost-effectiveness of arbitrage trading has deteriorated sharply. When the cost of borrowing yen rises from nearly zero to 0.75%, and future expectations indicate it will continue to rise to 1% or even higher, arbitrage traders face a dilemma: either bear the higher financing costs that erode profits or close positions and exit. Historical experience shows that when arbitrage trading begins to unravel, the speed at which funds flow back to Japan may far exceed expectations.

Currently, most mainstream central banks are in a rate-cutting cycle, while the Bank of Japan is raising rates contrary to the market, creating policy divergence. This contrast can easily trigger arbitrage trading closures, and the cryptocurrency market, which has high leverage and 24-hour trading characteristics, often feels the liquidity shock first. JPMorgan Private Bank expects the USD/JPY fundamentals to remain around the high level of 150, with 160-162 as potential defense ranges, but if the yen continues to appreciate, the pressure for arbitrage closures will intensify.

It is worth noting that although the latest TIC data shows that Japanese capital has not yet returned on a large scale from the U.S. bond market (with holdings increasing to $1.2 trillion in October), this trend may gradually become evident as the attractiveness of domestic Japanese bonds rises, thereby pushing U.S. bond yields and global dollar financing costs upward, which exerts pressure on risk assets.

The cryptocurrency market faces a historical pattern test

(Source: Trading View) Historical data is not optimistic for cryptocurrency market investors. After the last three interest rate hikes by the Bank of Japan, Bitcoin saw significant pullbacks within 4 to 6 weeks, usually falling by 20% to 30%. It dropped by 23% in March 2024, 26% in July, and 31% in January 2025. Macro analysts have warned that if the Bank of Japan raises interest rates on December 19, Bitcoin may face the risk of retracing to 70,000 USD.

Three Major Risk Points in the Cryptocurrency Market

Arbitrage trading closing directly impacts

The cryptocurrency market heavily relies on leverage and liquidity, and the deconstruction of yen arbitrage trading will directly reduce market buying pressure. High-leverage positions may be forced to liquidate, triggering a chain reaction.

83 trillion yen ETF clearing indirect pressure

Bloomberg reported that the Bank of Japan is expected to start gradually liquidating ETF assets as early as January 2026, with a holding market value of approximately 83 trillion yen as of the end of September. If accompanied by multiple interest rate hikes, bond sell-offs will accelerate, and risk appetite will cool significantly.

Cost of dollar financing rises transmission

The return of Japanese capital has pushed up US bond yields, and the rising cost of dollar financing will suppress all risk assets priced in dollars, with cryptocurrencies being the most affected as high-volatility assets.

However, the neutral viewpoint believes that simply attributing the historical decline to the Bank of Japan's interest rate hike is too one-sided. The expectations for this rate hike have already been fully priced in, with 50 economists unanimously predicting this increase. The market is more fearful of uncertainty rather than the tightening itself. Since last week, the crypto market has already adjusted in advance, with most of the panic sentiment factored into the prices. After the announcement, the yen exchange rate rose slightly by 0.3% to 156.06, Bitcoin broke above $87,000 with an increase of over 6%, and the Nikkei 225 index rose by 1.5% during the session. Overall, risk assets have not yet shown significant selling pressure.

Future policy path: 2026 may be a critical year

Market pricing indicates that the Bank of Japan may raise interest rates again as early as June or July 2026. Morgan Stanley predicts that after the rate hike, the Bank of Japan will still emphasize the accommodative nature of the policy environment, and that interest rates remain below neutral levels, with the future tightening path being gradual and highly data-dependent. Some analysts question whether this timetable is too aggressive, believing that October 2026 is a more realistic window, allowing sufficient room to assess the impact of rising borrowing costs on corporate financing, bank credit, and household consumption.

Ueda Kazuo stated that assessments of the economic outlook, price risks, and the likelihood of reaching targets will be updated at each meeting. He acknowledged that the estimated range for Japan's neutral interest rate is broad and difficult to measure accurately, requiring observation of the actual feedback from the economy and prices after each interest rate change. This statement indicates that the Bank of Japan has not preset an aggressive path but also retains the option to accelerate tightening based on data.

For risk assets, the results of the spring 2026 wage negotiations and the yen exchange rate will be key assessment indicators. If wage increases exceed expectations, inflationary pressures may rise further, and the Bank of Japan may raise interest rates earlier or accelerate the pace of rate hikes. Conversely, if economic data weakens, the process of policy normalization may be delayed, providing breathing space for risk assets. Warners believe that the role of the Bank of Japan in the global capital markets is underestimated, and a policy shift could trigger widespread deleveraging effects.