Odds Bank of Japan raises rates hits 80% with Bitcoin on the sideline

Bank of America Securities expects the Bank of Japan (BoJ) to raise its policy rate from 0.75% to 1.0% at its April 27-28 meeting. Markets already price roughly 80% odds of that outcome, according to swap data cited in recent BoJ meeting minutes.

The 25-basis-point move itself sounds modest, but the debate it has sparked runs deeper: could a return to 1% policy rates, last seen in Japan’s mid-1990s, trigger a global carry-trade unwind that forces deleveraging across risk assets, including Bitcoin?

In August 2024, a sharp yen rally tied to the unwinding of carry trade sent Bitcoin and Ethereum down as much as 20% in a matter of hours.

The Bank for International Settlements later documented the episode as a case study in forced deleveraging: margin calls cascaded across futures, options, and collateral structures, and crypto took the hit.

So when headlines now invoke the specter of “Japan at 1%” and “systemic risk,” the issue is whether history rhymes or whether this time the script is different.

The 1995 parallel and where it breaks down

On April 14, 1995, the Bank of Japan set its basic discount rate at 1.00%. By April 19, the dollar had collapsed to 79.75 yen, a post-Plaza Accord low that forced coordinated intervention.

Five months later, BoJ cut the discount rate to 0.50%, the start of a multi-decade experiment in ultra-low rates.

That year also followed the 1994 “Great Bond Massacre,” a global selloff that wiped an estimated $1.5 trillion from bond portfolios as US and European rates surged.

The confluence of those shocks, consisting of yen strength, bond volatility, and rate uncertainty, created the kind of macro turbulence that now gets invoked whenever Japan’s policy stance shifts.

However, the mechanics today are different. In 1995, the yen’s strength resulted from Japan’s current account surplus ballooning and foreign capital fleeing dollar-denominated assets. The policy rate move was a response, not the primary cause.

Today, the Federal Reserve holds rates at 3.50-3.75%, still 275 basis points above Japan’s current 0.75%, and that differential sustains the structural logic of the yen carry trade: borrow in yen at near-zero cost, invest in higher-yielding US or emerging market assets, pocket the spread.

A single 25 bps hike to 1.0% doesn’t erase that gap. What it can do is change expectations about the trajectory. And expectations, not the absolute level, drive currency volatility.

How carry trades unwind and why volatility matters

A carry trade’s payoff is straightforward: investors earn the interest differential, minus any currency appreciation on the funding leg.

Borrowing yen at 0.75% and earning 3.5% in dollars results in a net of roughly 2.75%, until the yen strengthens 2.75% and wipes out the gains. Leverage amplifies this dynamic.

At 10x leverage, a 1% yen move translates into a 10% equity drawdown, enough to trigger margin calls and forced selling.

The risk isn’t the hike itself. The risk is a hike that surprises, combined with positioning extremes and thin liquidity. In August 2024, the BoJ raised rates and signaled a more hawkish stance than markets had expected.

The yen rallied sharply. Volatility-targeting funds, which mechanically cut exposure when volatility rises, sold equities and other risk assets.

Futures positions unwound. Cross-currency basis spreads, which are the cost of hedging dollar liabilities with yen funding, blew out. Bitcoin, treated as liquid collateral by macro funds and frequently held in levered structures, sold off alongside tech stocks and high-beta equities.

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

The episode proved that Bitcoin, despite its narrative as a non-correlated asset, behaves like a risk-on trade when global liquidity conditions tighten suddenly.

Japan’s Treasury holdings and the ‘repatriation’ channel

Japan holds approximately $1.2 trillion in US Treasuries as of November, 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, such as pension funds, life insurers, and banks, face a different calculation: why hold 10-year Treasuries at 4.0% and bear currency risk when JGBs now yield closer to 1.5% and carry no FX exposure?

This rebalancing doesn’t happen overnight, but it happens.

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

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

The effect is indirect but real: Bitcoin’s valuation is partly a function of the opportunity cost of holding it versus risk-free assets, and when that opportunity cost rises, speculative demand weakens.

The flip side matters too. If the BoJ disappoints hawks and holds rates steady, July or September becomes the next live window, after which the carry trade rebuilds, the yen weakens, and the repatriation narrative fades.

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