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

Written by: Zhou, ChainCatcher

The Bank of Japan (BOJ) decided to raise the policy interest rate by 25 basis points, from 0.5% to 0.75%, at its monetary policy meeting ending on December 19, 2025. This is the second rate hike by the BOJ since January of this year, and the interest rate level has reached the highest record since 1995.

The resolution was passed with a unanimous vote of 9:0, fully in line with market expectations. The 50 economists interviewed earlier had all predicted this interest rate hike, marking the first time during Governor Ueda's tenure that there has been a “unanimous” expectation for an interest rate increase.

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

Ueda emphasized that assessments of economic prospects, 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 wide and difficult to measure precisely, requiring observation of the actual feedback from the economy and prices following each interest rate change. If wage increases continue to pass through to prices, rate hikes are indeed possible.

The capital market has 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 slightly by 1 basis point to 3.385%; the Nikkei 225 index rose 1.5% during the session to 49,737.92 points; Bitcoin broke above $87,000, with an intraday increase of 1.6%. Overall, risk assets have not shown significant selling pressure.

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

At the same time, Japan's major labor unions have set salary increase targets that are on par with last year in the upcoming “Shuntō” (spring wage negotiations), indicating that the momentum for wage growth continues, as last year saw the largest pay raises in decades.

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

Has the market fully digested 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 impact of the rate hike on the yen will be limited. Another rate hike to 1% is expected in 2026, and the USD/JPY fundamentals will remain near the high of around 150, with 160-162 as a potential defensive range. The negative interest rate differential and fiscal risks will continue to limit the appreciation potential of the yen.

However, some analysts question whether the timeline is too aggressive, believing that October 2026 is a more realistic window period, which would allow enough leeway 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 exchange rate of the yen will be the core assessment indicators.

In addition, Morgan Stanley expects that after a 25bp rate hike, the Bank of Japan will still emphasize the accommodative nature of the policy environment, and that interest rates will 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 the real interest rates remaining negative and the overall policy being relatively loose, the earliest next rate hike is expected to occur in the middle to late 2026, in order to observe the actual penetration of borrowing costs on the economy.

For a long time, Japan's ultra-low interest rate environment has provided significant 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 vast in scale and has been an important support for the bull market in risk assets over the past several years.

Although the latest TIC data shows that Japanese capital has not yet returned on a large scale from the U.S. bond market (with holdings increasing to $1.2 trillion in October), this trend may gradually become apparent as the attractiveness of Japanese Government Bonds (JGB) rises, which could drive up U.S. bond yields and global dollar financing costs, putting pressure on risk assets.

Currently, most mainstream central banks are in a rate-cutting cycle, while the Bank of Japan is raising rates contrary to the trend, creating a policy divergence. This contrast can easily trigger the closing of arbitrage trades, and the cryptocurrency market, which has high leverage and 24-hour trading characteristics, is often the first to feel the liquidity shock.

Macroeconomic analysts have warned that if the Bank of Japan raises interest rates on December 19, Bitcoin may face the risk of revisiting the $70,000 level. Historical data shows that after the last three interest rate hikes, Bitcoin experienced significant corrections, typically dropping 20%-30% within 4-6 weeks. For example, it fell by 23% in March 2024, 26% in July, and 31% in January 2025. The market has been highly concerned that this rate hike will replicate this historical pattern.

The warners believe that Japan's interest rate hike remains one of the biggest variables in current asset pricing, and its role in the global capital markets is underestimated; a policy shift could trigger widespread deleveraging effects.

The neutral viewpoint believes that attributing the historical decline solely to Japan's interest rate hike is overly simplistic, and that the expectations for this rate hike have been extremely well-anticipated (the crypto market has already adjusted in advance since last week), with most of the panic sentiment already priced in. Analysts indicate that what the market fears more is uncertainty rather than the tightening itself.

It is worth mentioning that, according to Bloomberg, the Bank of Japan is expected to initiate a 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 interest rate hikes occur in 2026, the pace of bond sell-offs may accelerate, and the ongoing deconstruction of yen arbitrage trades could trigger a sell-off of risk assets and yen repatriation, having profound impacts on the stock market and cryptocurrencies.