The highest interest rates in 30 years! Under the gradual hawkish signals from the Bank of Japan, where will risk assets go?

Author: Zhou, ChainCatcher

On December 19, 2025, the Bank of Japan (BOJ) concluded its monetary policy meeting, deciding to raise the policy interest rate by 25 basis points, from 0.5% to 0.75%. This marks the second rate hike by the BOJ since January of this year, with the current rate level reaching the highest record since 1995.

The resolution was passed with a unanimous vote of 9:0, fully aligning with market expectations. The 50 economists surveyed prior to the meeting unanimously predicted this rate hike, marking the first instance of a "unanimous" rate hike expectation during Governor Kazuo Ueda's tenure.

At the press conference, BOJ Governor Kazuo Ueda pointed out that the short-term interest rate being at a 30-year high does not carry any special significance, and the officials will closely monitor the impact of interest rate changes. He stated that there is still distance from the lower bound of the neutral interest rate range, and the market should not expect a precise neutral rate range to be provided in the short term. The pace of future monetary support policy adjustments will depend on economic growth, price performance, and the financial market environment at that time.

Ueda emphasized that assessments of the economic outlook, price risks, and the likelihood of achieving targets will be updated at each meeting, and decisions will be made accordingly. He acknowledged that the estimated range for Japan's neutral interest rate is broad and difficult to calculate precisely, requiring observation of the actual feedback from the economy and prices following each interest rate change. If wage increases continue to be transmitted to prices, a rate hike is indeed possible.

The capital markets reacted relatively calmly: the USD/JPY exchange rate rose slightly by 0.3% to 156.06; the yield on Japan's 30-year government bonds increased by 1 basis point to 3.385%; the Nikkei 225 index rose by 1.5% during trading to 49,737.92 points; Bitcoin surged above $87,000, with an intraday increase of 1.6%. Overall, risk assets did not show significant selling pressure.

Looking back at the fundamentals, this rate hike in Japan received ample data support. In November, the core CPI increased by 3.0% year-on-year, in line with expectations, indicating that inflationary pressures remain strong and have been above the 2% policy target for 44 consecutive months; additionally, wage growth momentum is solid, and confidence in the large manufacturing sector has risen to a four-year high. Even in the face of U.S. tariff pressures, adjustments in corporate supply chains have shown significant resilience, with impacts being less than expected.

At the same time, Japan's major labor unions have set wage increase targets for the upcoming "Shunto" that are on par with last year, indicating that the momentum for wage growth continues, as last year saw the largest wage adjustments in decades.

Overall, while the magnitude of this rate hike is small, it signifies Japan's formal farewell to the long-term ultra-loose era and may become an important turning point for global risk asset liquidity at the end of the year.

Has the market fully digested the expectations?

Current market pricing indicates that the Bank of Japan may raise interest rates again as early as June or July next year. Tang Yuxuan from JPMorgan Private Bank believes that due to sufficient market pricing, the rate hike will have a limited uplifting effect on the yen. It is expected that there will be another rate hike in 2026 to 1%, with the USD/JPY fundamentals maintaining a high level around 150, and a potential defensive range of 160-162, as negative interest differentials and fiscal risks will continue to limit the appreciation potential of the yen.

However, some analysts question whether this timeline is overly aggressive, suggesting 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. At that time, the results of the spring wage negotiations and the yen exchange rate will be core assessment indicators.

Additionally, Morgan Stanley expects that after a 25bp rate hike, the BOJ will still emphasize the accommodative nature of the policy environment, as rates remain below neutral levels. The future tightening path will be gradual and highly data-dependent, without presuming an aggressive route.

Investinglive analyst Eamonn Sheridan believes that due to real interest rates still being negative, the overall policy remains accommodative, and the next rate hike is not expected until mid to late 2026 to observe the actual penetration of borrowing costs into the economy.

For a long time, Japan's ultra-low interest rate environment has provided massive cheap liquidity to global markets. Through "yen carry trades," investors borrow yen at low costs and invest in high-yield assets such as U.S. stocks and cryptocurrencies. This mechanism is substantial and has been a key support for the bull market in risk assets over the past years.

Although the latest TIC data shows that Japanese capital has not yet significantly returned from the U.S. Treasury market (with holdings increasing to $1.2 trillion by the end of October), this trend may gradually emerge as the attractiveness of Japanese government bonds (JGB) rises, potentially pushing up U.S. Treasury yields and global dollar financing costs, thereby exerting pressure on risk assets.

Currently, most major central banks are in a rate-cutting cycle, while the BOJ's rate hike creates a policy divergence. This contrast can easily trigger the unwinding of arbitrage trades, and the highly leveraged, 24-hour trading characteristics of the cryptocurrency market often feel the liquidity shock first.

Macro analysts have warned that if the BOJ raises rates on December 19, Bitcoin may face the risk of revisiting $70,000. Historical data shows that Bitcoin has experienced significant corrections after the last three rate hikes, typically falling by 20%-30% within 4-6 weeks. For instance, it dropped 23% in March 2024, 26% in July, and 31% in January 2025, with the market previously highly concerned that this rate hike would repeat this historical pattern.

Observers believe that the BOJ's rate hike remains one of the biggest variables in current asset pricing, and its role in global capital markets is underestimated, with a policy shift potentially triggering widespread deleveraging effects.

On the other hand, a neutral viewpoint argues that simply attributing historical declines to the BOJ's rate hikes is overly simplistic, and that the expectations for this rate hike are already extremely sufficient (the cryptocurrency market has already adjusted in advance since last week), with most panic sentiment already priced in. Analysts indicate that the market fears uncertainty more than the tightening itself.

It is worth mentioning that, according to Bloomberg, the BOJ is expected to begin the gradual liquidation of ETF assets as early as January 2026. As of the end of September, its ETF holdings were valued at approximately 83 trillion yen. If multiple rate hikes occur in 2026, bond sell-offs may accelerate, and the continued unwinding of yen carry trades could trigger sell-offs in risk assets and yen repatriation, having a profound impact on the stock market and cryptocurrencies.

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