Odds: Bank of Japan raises interest rates, Bitcoin hits 80% on the sidelines – one hidden signal decides everything

Bank of America Securities expects the Bank of Japan to raise the policy rate from 0.75% to 1.0% at its April 27-28 meeting. The market has already priced in the probability of that outcome by about 80%, according to swap data cited in recent Bank of Japan meeting minutes.

While a 25 basis point increase in itself sounds modest, the debate it provokes goes deeper. Could a return to 1% policy rates, last seen in Japan in the mid-1990s, trigger an unwinding of the global carry trade that forces deleveraging across risk assets, including Bitcoin?

In August 2024, Bitcoin and Ethereum fell by 20% in a few hours due to the sharp appreciation of the yen due to the unwinding of carry trades.

The Bank for International Settlements subsequently documented this episode as a case study of forced deleveraging. Cryptocurrencies suffered as margin calls cascaded into futures, options, and collateral structures.

So when headlines now raise the specter of “Japan is 1%” and “systemic risk,” the question is whether history is rhyming or whether the script is different this time.

1995 Parallel Lines and Where They Collapse

On April 14, 1995, the Bank of Japan set the standard official discount rate at 1.00%. By April 19, the dollar had plummeted to 79.75 yen, its lowest level since the Plaza Accord, which forced concerted intervention.

Five months later, the Bank of Japan cut the discount rate to 0.50%, beginning a decades-long experiment with ultra-low interest rates.

That year also came on the heels of the 1994 “bond massacre,” when interest rates in the U.S. and Europe soared, wiping an estimated $1.5 trillion from bond portfolios in the global crash.

The combination of these shocks, consisting of a strong yen, bond volatility, and interest rate uncertainty, has created the kind of macro turmoil that is now triggered every time Japan’s policy stance changes.

However, the mechanism today is different. The yen’s appreciation in 1995 was caused by Japan’s expanding current account surplus and foreign capital fleeing dollar-denominated assets. Changes in policy interest rates were a countermeasure, not the main cause.

Currently, the Fed is keeping interest rates at 3.50% to 3.75%, 275 basis points higher than Japan’s current rate of 0.75%. This difference supports the structural logic of the yen carry trade. The idea is to borrow yen at near-zero cost, invest it in high-yielding U.S. and emerging market assets, and pocket the spread.

A one-time 25bps hike to 1.0% will not close this gap. What it can do is change expectations about the trajectory. And expectations, not absolute levels, drive currency volatility.

How carry trades are resolved and why volatility matters

The payoff for a carry trade is straightforward: the investor earns the interest rate differential less currency appreciation on the financing leg.

If you borrow yen at 0.75% and earn 3.5% in dollars, your net profit will be about 2.75% until the yen appreciates 2.75% and you lose your profit. Leverage amplifies this dynamic.

At 10x leverage, a 1% yen move translates into a 10% stock drawdown, enough to trigger a margin call or forced sell.

The risk is not the price increase itself. The risks include extreme positioning and thin liquidity, as well as unexpected price increases. In August 2024, the Bank of Japan raised interest rates, taking a more hawkish stance than the market expected.

The yen soared. Volatility-targeting funds, which mechanically reduce exposure when volatility rises, sold stocks and other risky assets.

Unwinding futures positions. The cross-currency basis spread, which is the cost of hedging dollar debt with yen funding, has been wiped out. Bitcoin, which is often treated as liquidity collateral by macro funds and held in leveraged structures, sold off along with tech and high-beta stocks.

BIS has documented the process. Leveraged positions in cryptocurrency derivatives amplified selling, and liquidations accelerated when stop losses and margin thresholds were breached.

This episode proved that even though Bitcoin is an uncorrelated asset, it behaves like a risk-on trade when global liquidity conditions suddenly tighten.

Japan’s Treasury holdings and “repatriation” channels

Japan held about $1.2 trillion in U.S. debt as of November, making it the largest foreign creditor to the United States.

When the Bank of Japan raises interest rates, the yield gap between Japanese government bonds and government bonds narrows.

Japanese institutional investors such as pension funds, life insurance companies and banks face a different calculation. Why hold 10-year government bonds at 4.0% and take on currency risk when the yield on government bonds is currently close to 1.5% and there is no currency exposure?

This rebalancing will not happen overnight, but it will happen.

Data from the U.S. Treasury International Capital (TIC) tracks these trends, and a continued decline in Japan’s holdings would put upward pressure on U.S. yields, thereby tightening global financial conditions.

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

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

The back side is also important. If the Bank of Japan defies the hawks’ expectations and leaves interest rates unchanged, the next real period will be in July or September, after which the carry trade will be restructured, the yen will weaken, and the story of repatriation will fade.

As risk appetite improves, Bitcoin is likely to trade higher alongside stocks and credit.

April scenario and its impact on Bitcoin

There are three possible scenarios for April.

In the first scenario, the Bank of Japan raises the policy rate to 1.0% in April, but guidance continues to be measured as “data dependent” and “gradual normalization”, with no signs of accelerated tightening.

The yen has appreciated moderately and volatility remains subdued.

Bitcoin is slow to react or doesn’t last long. Any decline reflects broader risk-off sentiment rather than forced deleveraging. More important than the rate hike itself is the liquidity of the US dollar and the performance of the stock market.

The second scenario would materialize if rate hikes were accompanied by hawkish forward guidance or coincided with stronger-than-expected Japanese wage statistics.

The yen has rebounded by up to 5% in a week, driven by stop-loss orders and speculative position covering. Cross-currency-based spreads will widen. Volatility control strategies reduce exposure. Margin calls have hit macro funds and crypto derivatives traders. Bitcoin has fallen between 10% and 20%, reflecting the August 2024 episode.

This is a systemic risk scenario. Not because interest rate levels are catastrophic, but because speed and positioning create liquidity events.

A third, less likely scenario is one in which the Bank of Japan takes a wait-and-see approach due to weak economic data and political uncertainty in the first quarter. Market prices rise again and the yen depreciates. Restructure the carry trade. Bitcoin is gaining bids alongside other risk assets as the changing narrative boosts sentiment.

The April meeting will not be held and the focus will shift to next year’s meeting.

What to watch instead of Doomscrolling

The answer to “Is the Bank of Japan’s move to 1% a systemic risk?” depends entirely on implementation and context.

Telegraphed orderly behavior is not an isolated event. Surprises, combined with thin markets and crowded positioning, can cause cascading volatility.

Investors should closely monitor the Bank of Japan’s April 27-28 statement and outlook report to better understand the potential impact. In addition to decisions, it also includes language regarding future interest rate hikes and inflation expectations.

Furthermore, volatility is an accelerant, so it is important to monitor the implied volatility of USDJPY, not just the spot rate.

It is also recommended to look at CFTC’s positioning data and keep an eye on whether an extreme yen short occurs. Finally, we track TIC data for signs of Japanese government bond repatriation, even if the flow is slow.

Bitcoin’s role in this movement is clear. Bitcoin is liquid, leveraged, and treated as risk collateral by the same macro traders who implement yen carry strategies.

When these trades unravel violently, Bitcoin is sold. However, as Bitcoin gradually unwinds (or if it does not unwind at all), Bitcoin’s correlation with traditional risk assets will weaken and Bitcoin will increasingly trade based on its own supply dynamics and institutional adoption trajectory.

The Bank of Japan’s interest rate hike to 1% is a reality. The risk of carry unwinding is real. However, risks are conditional and not inevitable.
The market has priced in a high probability of this move, thereby dispersing some of the surprise premium.

The question now is whether the path above 1% looks gradual or accelerating, and whether global liquidity conditions can absorb the correction without collapsing.

In the case of Bitcoin, it’s the difference between a volatility event to watch for and a systemic shock to prepare for.