On September 11, multiple media outlets reported, citing sources from the Bank of Japan, that the Bank of Japan is expected to raise interest rates again at next week's policy meeting, most likely increasing by 25 basis points to 1.25%. If this materializes, it would not only set a new high for interest rates in 31 years but also indicate that Japan is accelerating its exit from a prolonged period of extreme monetary easing just three months after raising rates in June. This gradual "lifting" of a marginal economy coincides with the "repricing" expectations of the world's largest bond market — ITC Markets believes that under the current macro environment, even if the Federal Reserve is hesitant on further rate hikes, the yield on the U.S. 10-year Treasury bond may still approach 5.1%, nearing highs not seen since July 2007. One is that the world's last zero-interest anchor is beginning to loosen, and the other is that the long-term rates of the global pricing benchmark are being pushed towards highs not seen in nearly two decades: when both major interest rate anchors in the U.S. and Japan move simultaneously, the overall risk-free return coordinates of global capital are elevated, enhancing the relative appeal of traditional assets and passively increasing the risk compensation required for holding high-volatility assets like BTC and ETH. For the cryptocurrency market, this is no longer just a policy news update from a single central bank but a new global liquidity shock revolving around the U.S.-Japan interest rate differential and U.S. Treasury yields, reshaping the risk appetite and asset pricing framework for on-chain dollar liquidity.
Japanese Rates Reach New 31-Year High: Yen Carry Trade Chain Begins to Loosen
At the other end of this newly elevated global interest rate differential coordinate system, Japan is no longer merely a "zero interest anchor." For many years, the Bank of Japan has maintained near-zero or even negative interest rates, making the yen one of the most important financing currencies globally: low-cost funds in the Tokyo interbank market have been bundled by hedge funds, Japanese institutions, and retail investors, flowing along the yield gradient into credit bonds, emerging markets, and high-volatility tech assets, with one segment of this chain ultimately connecting to margin accounts and perpetual contracts in the cryptocurrency market. Now, if sources are to be believed, a policy rate increase of 25 basis points to 1.25% next week would not only set a new 31-year high but would also come merely about three months after the last rate hike in June. However, insiders within the Bank of Japan still emphasize that "financial conditions remain loose" and judge that the economy is in a moderate recovery while price pressures are building — this, in the eyes of traders, looks more like the beginning of a rate hike cycle rather than a one-off "technical adjustment."
Once the market interprets 1.25% as a starting point rather than an endpoint, the calculations for funds need to be redone: the yields on yen assets themselves are elevated, combined with internal signals that "if inflation overshoots, rate hikes will accelerate further," indicating that the returns for holding yen assets in the future are no longer insignificant. In contrast, the opportunity cost and risk of continuing to short the yen and leverage to buy high beta assets will also rise. The result is that some “yen carry trades” begin to flow back — cross-market leverage is passively shrinking, and those assets that are often relatively illiquid, highly leveraged, and most sensitive to funding costs are usually the first to be abandoned, leading to a delayed effect on core assets like BTC and ETH: the leverage on perpetual contracts is cut, protective buying in options rises, while the marginal buying power from the yen financing chain in the spot market tends to weaken. In this process, the yen transitions from being a "zero-cost chip" to “valuable liquidity,” which alone can reprice the entire carry trade channel extending from Tokyo's interest rates to on-chain risk assets.
U.S. Treasuries Push Toward 5%: Rising Risk-Free Rates Squeeze Cryptocurrency Premiums
As Tokyo's interest rates begin to awaken, Wall Street's risk-free rates are also rewriting pricing frameworks. ITC Markets expects that amidst the Federal Reserve's hesitance on whether to continue raising rates, the yield on 10-year U.S. Treasuries may still increase to 5.1%, which if reached, would be the highest since July 2007. On one side, the long-term bond issuance scale continues to expand, while on the other, the uncertainty around inflation and policy paths has deepened concerns about whether "U.S. treasury can be financed moderately," which has been reflected in the market’s early bets regarding the future trajectory of Treasury yields. Kit Lowe, a senior analyst from the institution in Sydney, even cautions that if the upcoming CPI forces the Federal Reserve to hike rates again, it may temporarily benefit the prices of long-duration bonds, but in the longer term, the pressure on the U.S. to increase bond issuance to fill the deficit will slowly push the entire yield curve to a higher plateau.
If the 10-year yield approaches 5.1%, it would mean that the global discount rate is realigning with pre-subprime crisis highs: in the valuation models of stocks, growth stocks, and tech stocks, the discount factor is collectively raised, and all assets deemed "long-duration, high-volatility" must go through a systemic compression. In the classification tables of macro traders, BTC and ETH are often placed in this category — they do not generate cash flow, and their returns highly depend on future prices and liquidity, making them extremely sensitive to risk-free rates. When U.S. Treasuries offer nearly 5% risk-free dollar returns, the risk premium required for holding BTC and ETH rises, and new funds are more inclined to first secure visible yields and interest differentials in bonds and money market instruments, making marginal bullish positions that were initially prepared to pay for high valuations hesitate. The result is that under the same macro liquidity conditions, the inflow speed of dollars into the blockchain slows down, the duration preferences of leveraged funds are forced to contract, and the valuation narratives of BTC and ETH must first traverse a higher risk-free rate threshold to have a chance of being repriced by the market.
U.S.-Japan Interest Differential Rewritten: Forex Volatility Penetrates Dollar-Pegged Currency Channels
When both the policy rates of Japan and the yield on U.S. 10-year Treasuries face upward pressures simultaneously, the U.S.-Japan interest differential is no longer a static structure that expands in one direction but is being repriced back and forth around the new high range of Japan potentially raising rates to 1.25% and U.S. Treasuries pointing toward 5.1%. Insiders from the Bank of Japan still insist that "even at 1.25% it is still loose," implying that the differential pattern will not be eliminated all at once but will remain in a state of dynamic adjustment for a relatively long time. For forex traders, this uncertain range itself is a source of volatility: the carry trade chain for financing yen to buy U.S. Treasuries and stocks needs to continuously hedge both exchange rates and interest rates. Every minor adjustment in interest differential expectations and Treasury paths will bring about new rounds of forex positions reshuffling and rebalancing.
Unlike the last round of interest differential cycles, this time, the "pathway" for funds increasingly goes through dollar-pegged currencies like USDT and USDC: cross-border institutions first exchange for dollar-pegged positions on-chain, and then realize them into U.S. Treasuries or money market tools through over-the-counter or custodial channels, or conversely, break down offline dollar assets into "dollars fragments" that can be rolled and dispatched in exchanges and on-chain liquidity pools. Under the environment where the long-term bond issuance pressure in the U.S. pushes up risk-free yields, while the market harbors doubts about fiscal expansion and monetary policy paths, holding dollar-pegged currencies for on-chain yield or redeeming them back into Treasuries and money market tools has turned into a real-time recalculated arbitrage issue. As interest rates rise, the "recall power" of off-chain assets for the same unit of on-chain dollars becomes stronger, directly shortening the stay time of dollar-pegged funds on-chain, compressing liquidity available for matching BTC and ETH bulls and structured leverage, thus effectively writing the fluctuations of the U.S.-Japan interest differential and Treasury yields into the liquidity gates of the cryptocurrency markets.
BTC and ETH: From Liquidity Tailwinds to Rate Hike Headwinds in Repricing
As the market anticipates that Japan is being lifted from near-zero interest rates to 1.25%, and at the same time, predictions arise that the yield on U.S. 10-year treasuries may point towards 5.1%, BTC and ETH face not just a policy event from a single country but rather a global situation where the "risk-free rate anchor" is being pushed up overall. Even if whether the Bank of Japan raises rates or the trajectory of U.S. Treasury yields indicated by ITC Markets is still just expectations rather than established facts, funding will be preemptively calculated based on the "worst yet reasonable" scenario: if Treasury and short-term tools' coupon can remain at a higher range for a long time, the space for cryptocurrency assets as "liquidity overflow containers" is being squeezed, and BTC and ETH must offer more persuasive compensation in terms of volatility or risk premium to retain the same unit of on-chain dollars.
In this phase of rapid rate hikes with an unclear policy path, the typical reaction of the cryptocurrency market is to first thin out leverage and then recalculate structural income: futures premiums narrow, and the premium of distant months relative to near months gets flattened, even temporarily trading at a discount in extreme sentiment; the originally ample "arbitrage corridor" between spot and derivatives is forced to narrow and rearrange. In this process, the competitiveness of BTC and ETH strategies that solely rely on unilateral price increases declines rapidly, as they are now competing with higher risk-free rates and tools that can lock in coupon off-chain for funds; in contrast, cross-period basis, cross-market interest differentials, and options volatility trading are more suitable to be treated as "macro tools" for hedging against the fluctuations of the U.S.-Japan interest differential and Treasury yields, while the prices and volatility curves of BTC and ETH will depend on the actual decisions of the Bank of Japan, Kazuo Ueda’s guidance on interest rate ceilings, and whether the market genuinely views the "alignment of 10-year U.S. Treasuries towards 5.1%" as a new baseline scenario.
The Three Key Macro Signals and On-Chain Reactions to Watch Next
On a trading level, the most crucial first signal coming up is the Bank of Japan's meeting itself next week: whether it really raises the policy interest rate to 1.25%, the 31-year high, and how the post-meeting statement portrays price pressures and the judgment of "financial conditions still being loose" — more importantly, whether Ueda will provide a clear boundary for interest rate ceilings and the pace during the press conference. If it merely raises to 1.25% and then shifts to a wait-and-see approach, this has completely different consequences for the U.S.-Japan interest differential, carry trades, and the inflow of funds back to Japan as compared to suggesting that it is "ready to accelerate rate hikes at any time." The second signal comes from the U.S.: how the upcoming rounds of CPI land will determine whether the market bets on the Federal Reserve being forced to lean hawkish again, thus calibrating the pricing of whether the yield on 10-year U.S. Treasuries approaches or even exceeds 5% or the 5.1% level indicated by ITC Markets. Once 5.1% becomes the baseline scenario, it equates to a reenactment of the high-pressure since July 2007, under the combined impact of "fiscal expansion + bond issuance pressure," posing a hard ceiling on the valuations of all long-duration risk assets. The third signal is a purely technical observation from a cryptocurrency perspective: whether the correlations between BTC, ETH and 10-year Treasury yields, the U.S. dollar index, and yen exchange rates show a regime shift (from "high correlation" to "risk-off decoupling" or vice versa), and during the windows of the Bank of Japan's decision, U.S. CPI, and large fluctuations in Treasury yields, whether the net inflows and outflows of on-chain dollar funds exhibit obvious magnification effects — these three clues will collectively determine whether BTC and ETH will be marginalized into mere background noise concerning rate trades in this round of repricing of the U.S.-Japan interest differential and Treasury yields or be re-evaluated as core chips for cross-market hedging against macro volatility.
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