Market participants in the cryptocurrency space traditionally look to the decisions of the U.S. Federal Reserve. However, the policy of the Bank of Japan (BoJ) plays an equally important role in shaping the dynamics of digital assets.
Japan occupies a unique position in the global liquidity distribution system. When funding conditions in the country tighten, the price of bitcoin often shows a sharp decline.
The carry trade mechanism and the cryptocurrency market.
For decades, the Japanese regulator has adhered to a policy of near-zero or negative interest rates. This has turned the yen into one of the most accessible currencies for borrowing in the world. This factor has contributed to the development of the carry trade strategy.
Large financial institutions, including hedge funds, banks, and asset management companies, attract capital in yen through Japanese banks and currency swap markets. These funds are then converted into dollars or euros for investment in higher-yielding assets.
Such instruments include stocks, bonds from emerging markets, and cryptocurrencies. Bitcoin receives significant support as long as financing remains accessible and abundant. High volatility and round-the-clock trading make it an attractive tool for funds using borrowed capital. Any increase in the Bank of Japan's rate disrupts the functioning of this system.
The consequences of minimal changes in interest rates.
The expected actions of the Japanese regulator may seem insignificant. Markets predict an increase in the rate of about 25 basis points, bringing the indicator to 0.75%. This value remains significantly lower than levels in the USA or the European Union.
However, the key issue is not the size of the step, but the structural shift. After decades of zero interest rate policy, even a minimal increase changes market expectations. If investors see this as the beginning of a tightening cycle, they will begin to reduce positions in risky assets in advance. Bitcoin reacts to such changes faster than stock or bond markets due to the lack of trading pauses.
The most significant declines in Bitcoin are usually caused not only by direct asset sales but also by forced closures of leveraged positions. The tightening rhetoric of the Bank of Japan strengthens the national currency and increases bond yields. This creates pressure on all classes of risk assets simultaneously.
When the price of Bitcoin reaches critical technical levels, the mechanisms of exchanges come into play. The cryptocurrency market heavily depends on perpetual futures and margin trading. When the exchange rate drops, traders' positions reach liquidation thresholds.
Exchanges automatically liquidate collateral to cover losses. This process triggers a new wave of price declines, provoking subsequent liquidations. Thus, the initial shock from changes in currency rates transforms into a large-scale market collapse.
If market participants see the beginning of multi-step tightening policies, they will play out this scenario in advance. Position reductions occur proactively.
The very act of preemptively exiting risky assets can trigger another wave of sell-offs across all major segments. Bitcoin shows maximum sensitivity to such trends due to continuous trading and higher reactivity than traditional instruments.
Tightening of the Bank of Japan's policy may provoke liquidations.
The largest declines in Bitcoin are rarely explained solely by the realization of spot sales. The key factor here is the use of leverage.
The hawkish policy of the Bank of Japan leads to a strengthening of the yen and rising global yields. Synchronous pressure arises on risk assets.
After this, Bitcoin loses significant technical levels. For cryptocurrency markets, this is critical—the structure depends primarily on perpetual contracts and leveraged operations.
The most significant declines in Bitcoin are usually caused not only by direct asset sales but also by forced closures of leveraged positions. The tightening rhetoric of the Bank of Japan strengthens the national currency and increases bond yields. This creates pressure on all classes of risk assets simultaneously.
When the price of Bitcoin reaches critical technical levels, the mechanisms of exchanges come into play. The cryptocurrency market heavily depends on perpetual futures and margin trading. When the exchange rate drops, traders' positions reach liquidation thresholds.
Exchanges automatically liquidate collateral to cover losses. This process triggers a new wave of price declines, provoking subsequent liquidations. Thus, the initial shock from changes in currency rates transforms into a large-scale market collapse.
Indicators for monitoring the regulator's actions.
The risks associated with decisions from the Japanese authority are escalating ahead of official announcements. Professional market participants monitor several leading signals:
Strengthening of the yen, indicating a winding down of carry trade operations.
Rising yields on Japanese government bonds.
A decrease in open interest volumes on cryptocurrency exchanges, indicating an outflow of borrowed capital.
Breakdown of key support levels for Bitcoin.
The tone of the regulator's accompanying statements also matters. An interest rate increase accompanied by soft comments can calm the markets. In contrast, tough signals about further tightening will intensify pressure on quotes. The Bank of Japan remains the most important source of global liquidity, and Bitcoin pays the price for its reduction first.
