With the Bank of Japan issuing increasingly hawkish signals, where will risk assets go?

Author: Zhou, ChainCatcher

At its monetary policy meeting, which concludes on December 19, 2025, the Bank of Japan (BOJ) decided to raise its policy rate by 25 basis points, from 0.5% to 0.75%. This is the BOJ's second rate hike since January of this year, bringing the rate to its highest level since 1995.

The resolution was passed unanimously with a 9-0 vote, fully in line with market expectations. All 50 economists surveyed previously predicted this rate hike, marking the first time during Governor Kazuo Ueda's tenure that there was such a unanimous consensus on the expected rate hike.

Bank of Japan Governor Kazuo Ueda stated at a press conference that the current 30-year high in short-term interest rates has no special significance, and the government will closely monitor the impact of interest rate changes. He indicated that the current rate is still some distance from the lower limit of the neutral interest rate range, and the market should not expect a precise range for the neutral interest rate in the short term. As for the pace of subsequent adjustments to monetary support policies, it will depend on economic growth, price performance, and the financial market environment at that time.

Ueda emphasized that he would update his assessment of the economic outlook, price risks, and the likelihood of achieving the target at each meeting, and make decisions accordingly. He acknowledged that the range for estimating Japan's neutral interest rate is wide and difficult to calculate precisely, and that it is necessary to observe the actual response of the economy and prices to each interest rate change. If wage increases continue to be transmitted to prices, an interest 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 30-year Japanese government bonds rose slightly by 1 basis point to 3.385%; the Nikkei 225 index rose 1.5% to 49,737.92 points during the session; Bitcoin broke through $87,000, with a daily increase of 1.6%. Overall, risk assets did not show significant selling pressure for the time being.

Looking at the fundamentals, Japan's interest rate hike was well supported by data. Its core CPI rose 3.0% year-on-year in November, in line with expectations, indicating continued strong inflationary pressures and that it has remained above the 2% policy target for 44 consecutive months. Furthermore, wage growth remained solid, confidence in large manufacturers rose to a four-year high, and even in the face of US tariff pressures, adjustments to corporate supply chains showed significant resilience, with the impact being less than expected.

Meanwhile, major Japanese labor unions have set wage increase targets for the upcoming spring wage battles to be the same as last year, indicating that wage growth momentum continues, given that last year saw the largest wage increase in decades.

Overall, although the rate hike was small, it marks the end of Japan's long-term ultra-loose monetary policy era and may become an important turning point for global risk asset liquidity at the end of the year.

Has the market fully priced in the expectations?

Current market pricing suggests the Bank of Japan may raise interest rates again as early as June or July next year. Tang Yuxuan of JPMorgan Private Bank believes that due to sufficient market pricing, the rate hike's boost to the yen will be limited. She anticipates another rate hike to 1% in 2026, with the USD/JPY exchange rate expected to remain high around 150, and 160-162 representing a potential defensive range. Negative interest rate differentials and fiscal risks will continue to limit the yen's appreciation potential.

However, some analysts question whether this timeline is too aggressive, arguing that October 2026 would be a more realistic window, allowing sufficient time to assess the impact of rising borrowing costs on corporate financing, bank credit, and household consumption. At that time, the outcome of the spring wage negotiations and the yen exchange rate will be key assessment indicators.

Furthermore, Morgan Stanley expects that even after a 25bp rate hike, the Bank of Japan will still emphasize the accommodative nature of its policy environment, and that interest rates will remain below neutral levels. The future tightening path will be gradual and highly data-dependent, without presupposing an aggressive approach.

Investinglive analyst Eamonn Sheridan believes that with real interest rates still negative and overall policy remaining loose, the next rate hike is not expected until mid-to-late 2026 at the earliest, in order 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 amounts of cheap liquidity to the global market. Through "yen carry trades," investors can borrow yen at low cost and invest in high-yield assets such as US stocks and cryptocurrencies. This mechanism is large-scale and has been a key support for the bull market in risky assets over the past few years.

Although the latest TIC data shows that Japanese capital has not yet flowed back from the US Treasury market on a large scale (holdings increased to $1.2 trillion in October), this trend may gradually emerge as the attractiveness of Japanese government bonds (JGB) increases, thereby pushing up US Treasury yields and global dollar financing costs, putting downward pressure on risk assets.

Currently, most major central banks are in a rate-cutting cycle, while the Bank of Japan is raising rates against the trend, creating a policy divergence. This contrast can easily trigger the liquidation of arbitrage positions, and the crypto market, with its high leverage and 24-hour trading characteristics, is usually the first to feel the liquidity shock.

Macro analysts had warned that if the Bank of Japan raised interest rates on December 19, Bitcoin could face a retest of the $70,000 level. Historical data shows that Bitcoin experienced significant corrections after the last three rate hikes, typically falling 20%-30% within 4-6 weeks. For example, it fell 23% in March 2024, 26% in July 2024, and 31% in January 2025. The market was previously highly concerned that this rate hike would repeat this historical pattern.

Analysts argue that Japan's interest rate hikes remain one of the biggest variables in current asset pricing, its role in global capital markets is underestimated, and a policy shift could trigger a widespread deleveraging effect.

A neutral view argues that attributing historical declines solely to Japan's interest rate hikes is too simplistic, and that the current rate hike was already largely anticipated (the crypto market has already corrected in advance since last week). Most of the panic has already been priced in, and analysts say the market is more afraid of uncertainty than of tightening itself.

It's worth noting that, according to Bloomberg, the Bank of Japan may begin a phased liquidation of its ETF assets as early as January 2026. As of the end of September, its ETF holdings were valued at approximately 83 trillion yen. If 2026 sees multiple interest rate hikes, bond sell-offs could accelerate, and the continued dismantling of yen carry trades could trigger a sell-off of risk assets and a repatriation of yen, having a profound impact on the stock market and cryptocurrencies.

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