Recently, there is a financial development worth following: The Bank of Japan announced an interest rate hike of 25 basis points on December 19, raising the policy interest rate to 0.75%. It seems nothing special, but there is a huge risk behind it.

The problem is here—there are about $9 trillion in positions in the market that are supported by low-interest yen financing. When Japanese interest rates were ridiculously low, many investors borrowed yen to invest in other high-yield assets, which is known as the yen carry trade. Now, with Japan raising interest rates, the interest rate differential between Japan and the US is narrowing, making this game start to become unprofitable.

What does it mean when these carry trades start to reverse on a large scale? This huge amount of capital will need to be withdrawn from various markets to close positions, which will put long-term pressure on global financial conditions. Not only will the stock market and bond market be affected, but it will also create ongoing suppression of global liquidity. The risks in the Japanese bond market are also rising.

For the cryptocurrency market, tight liquidity has never been good news. The recent actions of the Bank of Japan may become a long-term variable worth keeping an eye on.