The Bank of Japan is once again at the center of global market anxiety.
The Bank of Japan (BOJ) is scheduled to announce its next interest rate decision on December 19, and rising interest rate speculation has raised concerns that Bitcoin (BTC) and other risk assets may face new pressures.
Bank of Japan Governor Kazuo Ueda said further interest rate hikes may be possible this month.
Analysts and traders alike are seeing echoes of previous market tremors and fear history could soon repeat itself.
Related: How a $500 Billion Japan Bank Fund Could Drive Bitcoin Prices Higher
The Bank of Japan’s policy decisions will have global ripple effects because arbitrage tradea strategy in which investors borrow Japanese yen at near-zero interest rates to purchase higher-yielding U.S. dollar assets.
When Japan raises interest rates, these trades unwind, triggering liquidity outflows from stocks, bonds and even digital assets like Bitcoin.
Here’s a simple process of how an arbitrage trade collapse could lead to Bitcoin’s collapse:
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Japanese bond yields climbed.
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The yen appreciated rapidly.
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The cost of servicing yen-based debt suddenly became more expensive.
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Highly leveraged investors scrambled to exit their positions to limit losses.
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These sales triggered margin calls.
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Margin calls triggered a wave of forced liquidations.
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The liquidations fueled further selling in risk assets.
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As cheap liquidity disappears, Bitcoin is often the first asset investors sell.
Cryptocurrency traders are ready for big swings. A December Reuters poll showed that 90% of economists, or 63 out of 70 economists, expected the Bank of Japan to raise short-term interest rates to 0.75% from 0.50% at its December 19 meeting.
Bitcoin has historically reacted negatively to the Bank of Japan’s tightening cycles.
A similar reaction could be seen this month if the Bank of Japan raises interest rates again.
“This story brings with it shadows of the 2022 meeting before Christmas, when the Bank of Japan raised the cap on 10-year Japanese government bonds from 0.25% to 0.5%. This spooked the market a bit,” Deutsche Bank analysts wrote in a recent report, according to the Washington Daily News.
Cryptocurrency analysts CryptoNobler and EX also predict further losses for Bitcoin:
