Bank of Japan Governor Kazuo Ueda used his first public appearance of 2026 to send an unmistakable message: the central bank’s rate-hiking cycle is far from over.
The comments came roughly two weeks after the BOJ raised its benchmark rate to 0.75% on December 19—the highest level since 1995. That decision, however, was overshadowed by Ueda’s vague guidance on future hikes, which disappointed markets and sent the yen tumbling to record lows against the euro and Swiss franc. His New Year remarks appear designed to correct that messaging.
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Bond Markets React
“We will keep raising rates in line with improvement in the economy and inflation,” Ueda said Monday at a New Year’s conference hosted by the Japanese Bankers Association. “The appropriate adjustment of monetary easing will lead to the achievement of stable inflation target and longer-term economic growth.”
Shortly before Ueda’s speech, Japan’s benchmark 10-year bond yield continued its ascent, reaching its highest level since 1999. The move reflects growing market conviction that further rate increases are on the way.
Most BOJ watchers expect the next hike around mid-2026, though some analysts warn it could come sooner if yen weakness persists. The currency was trading around 157.15 per dollar at midday in Tokyo—uncomfortably close to the 160 threshold that market participants believe could trigger government intervention.
Last summer, Japanese authorities sold approximately $100 billion to defend the currency at similar levels. Vice Finance Minister Atsushi Mimura warned last month that officials are prepared to take “appropriate action” against excessive currency moves.
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Structural Risks Lurking
The BOJ itself acknowledged in late December that “Japan’s real policy interest rate is by far at the lowest level globally.” Despite rising to 0.75%, inflation running at 2.9% keeps the real rate profoundly negative at roughly -2.15%. The central bank noted there remains “considerable distance to the neutral interest rate level”—signaling potentially 100-175 basis points of additional hikes ahead.
The strain is already showing in Japan’s financial system. Norinchukin Bank, the agricultural cooperative lender, reported $12.6 billion in losses and was forced to sell $63 billion in foreign bonds. Regional banks are sitting on approximately ¥3.3 trillion in unrealized losses, up 260% since March 2024, as rising yields erode the value of their bond holdings.
In a symbolic shift, Germany overtook Japan as the world’s largest creditor nation late last year—the first time in 34 years. The reversal underscores that Japan’s capital outflows, which once funded global markets, are beginning to reverse.
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What It Means for Bitcoin
For crypto markets, the BOJ’s hawkish pivot raises familiar concerns. Bitcoin has fallen 20-31% following each of the past three BOJ rate hikes, as the unwinding of yen carry trades drains liquidity from global risk assets.
The mechanism is straightforward: for decades, investors borrowed yen at near-zero rates to fund investments in higher-yielding assets worldwide, including cryptocurrencies. As Japanese rates rise, this trade becomes increasingly unprofitable, forcing position liquidations across markets.
The August 2024 flash crash offers a stark reminder of what can happen when these positions unwind rapidly. When the BOJ raised rates without explicit advance signaling, the Nikkei plunged 12% in a single day, and Bitcoin tumbled alongside it.
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For now, the yen’s muted response to Ueda’s comments suggests markets are waiting for action rather than words. The carry trade remains intact as long as yen weakness persists and real interest rate differentials favor the dollar—currently exceeding 3.5 percentage points.
Looking Ahead
The BOJ’s next policy decision on January 23 will be pivotal. If officials deliver another rate hike or signal accelerated tightening, the yen could strengthen sharply, triggering the kind of rapid carry trade unwinding that has historically pressured crypto markets.
Conversely, continued policy ambiguity would likely extend the current uneasy calm—but at the cost of further yen depreciation and rising intervention risks.
Either way, crypto traders should remain alert to Japan-driven volatility in the weeks ahead. As Robin Brooks of the Brookings Institution warned, Japan is walking a tightrope “between currency debasement and a debt crisis.” How it navigates that balance will have consequences far beyond Tokyo.