The Bank of Japan made a significant decision at its December 19th meeting: to raise interest rates by 25 basis points, bringing the benchmark rate to 0.75%. This may seem like a regional monetary policy adjustment, but it could actually be rewriting the landscape of global capital flows.

Over the past decade, in an environment close to zero interest rates, the yen has become the cheapest financing tool for global investors. According to statistics, approximately $9 trillion in funds have been deployed into various risk assets through yen carry trades—from stocks and bonds to digital assets. The large influx of these funds is primarily because the cost of yen financing is nearly zero, while interest rates for currencies like the US dollar and euro are much higher.

Now, the variables have changed. As Japan begins to gradually raise interest rates, the interest rate differential between Japan and the US is narrowing. If this trend continues, the massive carry trade funds are likely to gradually withdraw, flow back to Japan, or hedge risks. When liquidity starts to contract, all risk assets supported by low financing costs will feel the pressure—stocks will come under pressure, and the high valuations of cryptocurrencies will also be hard to sustain.

The issue is not limited to this. Japan itself is facing structural fiscal challenges. The government recently approved a sizable supplementary budget to address short-term expenditures, and in the medium term, policies such as expanding defense budgets and discussions on consumption tax reductions could further increase debt ratios. This means Japan’s rate hike process may not accelerate quickly, but this gradual monetary tightening is enough to alter the flow of global capital.

From another perspective, this is a slow but profound change. The market’s current reaction remains relatively stable, but structural liquidity contraction will be a long-term process. For cryptocurrency investors, paying attention to the trends in the yen exchange rate, the US-Japan interest rate differential, and changes in international capital flows will be more strategically meaningful than focusing on short-term volatility.

In short, Japan’s step-by-step rate hikes are like tightening the global financial liquidity faucet. In the current optimistic sentiment, it is essential to remain vigilant about this structural risk and to manage risks prudently and make rational decisions.