Will history repeat itself? Preparing for the scenario of interest rate hikes by the Bank of Japan in December

Since the beginning of 2024, a clear pattern has emerged: each time the Bank of Japan decides to raise interest rates, the price of bitcoin drops by over 20%. History confirms this pattern – March saw a decrease of about 23%, July around 26%, and last month the market experienced a three-day decline of approximately 31%. Now, with a 98% probability of another rate hike (according to the Polymarket predictive platform), investors are once again asking: will history repeat itself?

The market is fully prepared – but is that a guarantee?

The consensus is almost unanimous. In a Reuters poll, as many as 90% of economists (63 out of 70) expect the Bank of Japan to raise the short-term rate from the current 0.5% to 0.75% during the December 18-19 meeting. On the same day, the yield on 10-year Japanese government bonds already increased to 1.95%, suggesting that the market has priced in this scenario in advance.

Currently, Bitcoin hovers around $92,170, having increased by 1.54% in the last 24 hours. However, this calm environment may be deceptive – when rates rise, high-risk assets like cryptocurrencies often lead the way in tightening liquidity.

How the carry trade mechanism on the yen irritates global markets

The key to understanding the global impact of rate hikes lies in the carry trade structure. International investors borrow low-interest-yen and reinvest these funds into higher-yield assets – U.S. bonds, stocks, or cryptocurrencies. The Bank for International Settlements estimates that the global value of these positions exceeds $1 trillion.

When the Bank of Japan raises rates, the cost of borrowing yen increases dramatically. The yen strengthens against the dollar, arbitrageurs are forced to close their positions, and markets experience what analysts call “reverse quantitative easing.” In July 2024, this effect was spectacular: bitcoin fell from $65,000 to $50,000, and the entire cryptocurrency market lost about $600 billion in market capitalization.

The VIX index is rising, but should we panic?

The fear index (VIX index) usually rises during such tightening. Leveraged position liquidations intensify, and volatility explodes across all markets. While the Fed is currently maintaining a dovish stance, keeping federal funds rates at 4.25%-4.5%, actions by the Bank of Japan could partially negate this stabilizing effect.

Nevertheless, not all analysts see a black scenario. Glassnode co-founder Negentropic points out that the market fears not the rate hikes themselves but the uncertainty surrounding these decisions. He notes that the normalization of Japan’s monetary policy sends clear signals to the global financial environment – and clarity means less chaos and more reliable assumptions for asset valuation.

Will the coming days be a turning point or a collapse?

History suggests a downside risk – considering the consistent pattern throughout the year. However, current macroeconomic conditions are more complex than before. The yen carry trade has significantly diminished, the Fed’s moderate policy provides a certain liquidity cushion, and analysts like AndrewBTC are pondering whether the market is facing asymmetric upside risk after the political pressure is released.

Bitcoin, as a high-beta asset, will remain sensitive to any movements in global liquidity. The question now is whether the cryptocurrency markets will interpret the Bank of Japan’s rate hike as a temporary disruption or the beginning of another risk reduction cycle. The answer will come next week.