The Bank of Japan decided to raise interest rates at its December meeting, which may completely break the era of extreme easing that has lasted for more than 20 years, shaking the global financial markets.

The root cause is actually very clear - the Japanese economy has finally emerged from the quagmire of deflation. Wages are rising, prices are also rising, creating a positive cycle, and interest rates should have returned to a normal track long ago.

The real risk lies here: the scale of funds borrowing yen for carry trades globally has reached trillions of dollars. To put it simply, it involves borrowing yen at low interest rates to invest in high-yield assets abroad. This strategy has earned a lot over the years. However, once the yen appreciates and interest rates rise, this game will operate in reverse — large-scale liquidations and frantic sell-offs.

The most liquid assets will be the first to suffer. The tech sector in the US stock market and highly liquid assets like Bitcoin may face the first round of impact. The Asian markets also need to stay alert.

For us traders, what we need to do at this stage is to keep a close eye on liquidity changes and be mentally prepared to deal with volatility. It might be worth considering increasing our allocation to some hedging assets to leave ourselves an escape route.