Bank of Japan increases interest rates, impacting Bitcoin as a key indicator influences outcomes.

Bank of America Securities anticipates that the Bank of Japan (BoJ) will increase its policy rate from 0.75% to 1.0% during its meeting on April 27-28. According to swap data referenced in recent BoJ meeting minutes, markets are already pricing in approximately 80% likelihood of this outcome.

While the 25-basis-point adjustment may seem minor, the discussion it has ignited is more profound: could a return to a 1% policy rate, a level last observed in Japan during the mid-1990s, initiate a global carry-trade unwind that compels deleveraging across risk assets, including Bitcoin?

In August 2024, a sudden yen appreciation linked to the unwinding of carry trades caused Bitcoin and Ethereum to drop by as much as 20% within hours.

The Bank for International Settlements later characterized this incident as a case study in forced deleveraging: margin calls cascaded through futures, options, and collateral frameworks, adversely impacting crypto.

Thus, when current headlines reference the notion of “Japan at 1%” and “systemic risk,” the question arises whether history will repeat itself or if this time the circumstances are different.

The 1995 parallel and where it breaks down

On April 14, 1995, the Bank of Japan established its basic discount rate at 1.00%. By April 19, the dollar had plummeted to 79.75 yen, a low not seen since the Plaza Accord, prompting coordinated intervention.

Five months later, the BoJ reduced the discount rate to 0.50%, marking the beginning of a prolonged experiment with ultra-low rates.

This period also followed the 1994 “Great Bond Massacre,” a worldwide selloff that erased an estimated $1.5 trillion from bond portfolios as interest rates surged in the US and Europe.

The combination of these shocks, including yen strength, bond volatility, and rate uncertainty, generated the type of macro turbulence that is often referenced whenever Japan’s policy stance changes.

However, the dynamics today differ. In 1995, the yen’s strength stemmed from Japan’s current account surplus expanding and foreign capital withdrawing from dollar-denominated assets. The policy rate adjustment was a reaction, not the primary driver.

Currently, the Federal Reserve maintains rates at 3.50-3.75%, still 275 basis points higher than Japan’s current 0.75%, and this differential supports the structural rationale for the yen carry trade: borrowing in yen at near-zero cost, investing in higher-yielding US or emerging market assets, and profiting from the spread.

A single 25 bps increase to 1.0% does not eliminate that gap. What it can do is alter expectations regarding the trajectory. And it is expectations, rather than the absolute level, that influence currency volatility.

Chart illustrates the Bank of Japan policy rate narrowing the gap with Fed rates while swap markets indicate a declining probability of a 1% hike in April.

How carry trades unwind and why volatility matters

The payoff from a carry trade is clear: investors gain from the interest differential, minus any currency appreciation on the funding side.

Borrowing yen at 0.75% and earning 3.5% in dollars yields a net of approximately 2.75%, until the yen appreciates by 2.75%, negating the profits. Leverage intensifies this effect.

With 10x leverage, a 1% movement in the yen results in a 10% equity drawdown, sufficient to trigger margin calls and forced selling.

The risk does not lie in the hike itself. The risk arises from a hike that surprises, combined with extreme positioning and low liquidity. In August 2024, the BoJ raised rates and indicated a more hawkish stance than the markets had anticipated.

The yen experienced a sharp rally. Volatility-targeting funds, which automatically reduce exposure when volatility increases, sold equities and other risk assets.

Futures positions were unwound. Cross-currency basis spreads, which represent the cost of hedging dollar liabilities with yen funding, widened significantly. Bitcoin, regarded as liquid collateral by macro funds and often held in leveraged structures, declined alongside tech stocks and high-beta equities.

The BIS documented the sequence: leveraged positions in crypto derivatives exacerbated the selloff, with liquidations accelerating as stop-losses and margin thresholds were breached.

This incident demonstrated that Bitcoin, despite its narrative as a non-correlated asset, behaves like a risk-on asset when global liquidity conditions tighten abruptly.

Chart depicts the August 2024 yen carry unwind with Bitcoin declining 20% as USD/JPY volatility surged and the yen strengthened by 6.8%.

Japan’s Treasury holdings and the ‘repatriation’ channel

As of November, Japan holds around $1.2 trillion in US Treasuries, making it the largest foreign creditor to the US.

When the BoJ raises rates, the yield gap between Japanese Government Bonds and Treasuries narrows.

Japanese institutional investors, including pension funds, life insurers, and banks, face a different calculation: why maintain 10-year Treasuries at 4.0% and incur currency risk when JGBs now yield closer to 1.5% and carry no FX exposure?

This rebalancing does not occur overnight, but it does take place.

Treasury International Capital (TIC) data monitor these flows, and any sustained reduction in Japanese holdings would exert upward pressure on US yields, thereby tightening global financial conditions.

Higher Treasury yields translate to higher discount rates for all risk assets, including Bitcoin.

The impact is indirect but significant: Bitcoin’s valuation is partially determined by the opportunity cost of holding it versus risk-free assets, and when that opportunity cost increases, speculative demand diminishes.

The opposite scenario is also important. If the BoJ disappoints hawkish expectations and maintains rates, July or September could become the next active window, after which the carry trade could rebuild, the yen could weaken, and the repatriation narrative could diminish.

Risk appetite would improve, and Bitcoin is likely to trade higher alongside equities and credit.

Scenarios for April and what they mean for Bitcoin

Three potential scenarios exist for April.

The first scenario involves the BoJ raising rates to 1.0% in April, but guidance remains cautious: “data-dependent,” “gradual normalization,” with no indication of accelerated tightening.

The yen appreciates slightly, and volatility remains subdued.

Bitcoin’s response is muted or short-lived. Any decline reflects broader risk-off sentiment rather than forced deleveraging. US dollar liquidity and equity market conditions are more influential than the hike itself.

The second scenario becomes relevant if the hike is accompanied by hawkish forward guidance or coincides with stronger-than-expected Japanese wage data.

The yen rallies sharply, potentially up to 5% in a week, driven by stop-loss orders and speculative position covering. Cross-currency basis spreads widen. Volatility-control strategies reduce exposure. Margin calls affect macro funds and crypto derivatives traders. Bitcoin declines by 10% to 20%, mirroring the August 2024 incident.

This represents the systemic risk scenario: not due to the rate level being catastrophic, but because the speed and positioning create a liquidity event.

The third and less likely scenario is where the BoJ delays, citing weaker first-quarter data or political uncertainty. Markets would reprice, the yen would weaken. Carry trades would rebuild. Bitcoin would likely see increased demand alongside other risk assets as the narrative shift enhances sentiment.

The April meeting could become a non-event, shifting focus to meetings later in the year.

Scenario	Market pricing vs outcome	Surprise score (bps) (actual – implied)	JPY move (range)	USD/JPY implied vol	Cross-currency basis	Risk assets	BTC expected response	What to watch
Measured hike (BoJ 0.75% → 1.00%) + gradual guidance	Mostly priced (e.g., “~80% odds”)	≈ +5 bps (0.75→1.00 vs ~0.95 implied)	JPY +1% to +2%	Contained (small uptick)	Stable (minor widening at most)	Mild de-risk; orderly rotation	Muted / short-lived dip; follows broader risk tone	BoJ wording (“gradual”, “data-dependent”), USDJPY vol staying low, positioning not extreme
Hawkish surprise (1.00% + faster-path signal)	Partially unpriced (path surprise)	≈ +25 to +50 bps (path repricing dominates)	JPY +3% to +5% (stop-outs/squeeze)	Spikes (vol accelerant)	Widens (hedging/funding stress)	Vol-control selling; deleveraging across risk	−10% to −20% (liquidity/forced selling risk)	BoJ path language (terminal rate hints), wage/inflation prints, CFTC yen shorts, cross-asset vol, basis/bank funding headlines
No hike (hold 0.75% + dovish tilt)	Unpriced / repricing lower	≈ −20 bps (0.75 vs ~0.95 implied)	JPY −1% to −2%	Fades	Narrows	Relief rally; carry rebuilds	Risk-on bid; trades up with equities/credit	BoJ emphasis on downside risks, next “live” window (July/Sep), USD liquidity tone, TIC flow trend (repatriation narrative cooling)

What to watch instead of doomscrolling

<pThe answer to the question “Is BoJ to 1% a systemic risk?” hinges entirely on execution and context.

A well-communicated, orderly adjustment is a non-event. A surprise, coupled with thin markets and crowded positioning, can lead to volatility that cascades.

To gain a clearer understanding of the potential implications, investors should closely observe the April 27-28 BoJ statement and Outlook Report. It is essential to consider not only the decision but also the language surrounding future hikes and inflation expectations.

Additionally, monitoring USDJPY implied volatility, rather than just the spot rate, is crucial, as volatility serves as the accelerant.

It is also advisable to track CFTC positioning data for extremes in yen shorts, which can trigger squeezes. Lastly, following TIC data for indications of Japanese Treasury repatriation, even if the flow is gradual, is important.

Bitcoin’s role in this context is evident: it is liquid, leveraged, and regarded as risk collateral by the same macro traders who implement yen carry strategies.

When those trades unwind abruptly, Bitcoin experiences a selloff. Conversely, when they unwind gradually (or do not unwind at all), Bitcoin’s correlation to traditional risk assets diminishes, and it trades more based on its own supply dynamics and institutional adoption trajectory.

The BoJ’s hike to 1% is imminent. The risk of a carry unwind is tangible. However, this risk is conditional, not guaranteed.
Markets have factored in a high probability of the move, thereby mitigating some of the surprise premium.

The current question is whether the trajectory beyond 1% appears gradual or accelerated, and whether global liquidity conditions can accommodate the adjustment without disruption.

For Bitcoin, this distinction determines whether it is a volatility event to monitor or a systemic shock to prepare for.

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