A new warning has emerged that the Bank of Japan may accelerate its rate hikes sooner than expected, a development that markets are currently overlooking but which could have serious consequences for both crypto and traditional markets.

Source and content of the warning
Tsutomu Watanabe, a retired economics professor at the University of Tokyo who left the BOJ in 1999, told Bloomberg that he believes the ultimate peak in this cycle will be higher than most people currently expect. In his own words, "the ultimate rate will be around 2 percent, maybe a little higher." This implies a significantly more aggressive path than the scenario the market is pricing in.
This warning does not come in a vacuum. The BOJ raised its policy rate to 1 percent on June 16, the fourth increase since the start of the tightening cycle in March 2024. Board member Naoki Tamura argues that interest rates should be raised in quarter-point increments every few months toward the neutral 2 percent level, adding that the bank should accelerate the pace of increases "without hesitation" if inflation risks intensify. Vice President Ryozo Himino similarly stated that the risk of inflation exceeding the 2 percent target is real. The driving force behind this increase:
The main issue is that inflationary pressure in Japan is no longer solely driven by domestic demand; the energy shock from the Iran war is creating a faster-than-expected pass-through in business-to-business pricing, and this is expected to spread more widely to consumer prices. At the same time, the yen is trading near its weakest levels in forty years, which is increasing import costs and further fueling inflation. The BOJ may have to accelerate interest rate increases to break this cyclical pressure.

Impact on Crypto Markets
The crucial point here is the yen-based carry trade mechanism. For years, investors have borrowed in Japan at near-zero interest rates and invested this money in higher-yielding instruments such as the US dollar, crypto assets, and other risk assets. If the BOJ rapidly raises interest rates towards 2%, the cost of this carry trade will increase, and many investors may be forced to close their positions. Such a unwinding could lead to sudden and sharp sell-offs in bitcoin and other risk assets, as happened in a similar scenario last year, because the closing of yen-financed positions usually starts with liquid and easily sellable assets, and crypto assets fall into this category. The second channel operates through the dollar. As Japan raises interest rates and the interest rate differential with the US narrows, the yen may tend to strengthen, which could weaken the dollar index. Historically, periods of weak dollars have been supportive for crypto assets, so from this perspective, the effect could paradoxically be positive. However, whether this effect materializes depends on how severe the sudden liquidity shock created by the unwinding carry trade will be. In the short term, a two-stage reaction could be seen: panic selling, and in the medium term, support stemming from dollar weakness.
The third channel is global liquidity. Japan has been one of the world's largest capital exporters for many years, with Japanese investors and institutions investing trillions of dollars in foreign assets. As interest rates rise and domestic bond yields become attractive, a repatriation of some of this capital can be expected. Such a return would mean a withdrawal of liquidity for global risk assets, including crypto, because the total money supply entering the market would contract. Impact on the traditional economy
Japan is an economy carrying debt of approximately 260 percent of its gross domestic product, much of which has been financed under the assumption of low interest rates. A rapid rise in interest rates to 2 percent and above would significantly increase debt servicing costs, which is directly linked to the historic rise in JGB yields we discussed in previous messages. Ten-year bond yields are already at their highest level in thirty years, and an accelerating interest rate hike cycle could further amplify this pressure. There's also an impact on companies, particularly small and medium-sized enterprises (SMEs) with variable-rate debt, as their financing costs increase. A similar effect applies to homeowners, as this marks a new era for households in Japan accustomed to near-zero interest rates for a long time. Overall assessment:
For those following both crypto and yen-linked assets via Gate, the key point is that it's not yet certain whether the BOJ will actually accelerate its rate hike pace; this is currently a personal opinion of a former official, not an official policy change. However, the market takes these signals seriously, as a similar carry trade resolution has led to a real and rapid wave of crypto selling in the past. Concrete signals from upcoming BOJ meetings, particularly whether the pace of increases shifts to a more aggressive tempo than a quarter point every few months, will be the most critical indicator clarifying how close this risk is.

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