Bank of Japan keeps interest rates unchanged, market wary of the global liquidity crisis behind it

The Bank of Japan, at its January 23rd monetary policy meeting, maintained short-term interest rates at 0.75% with an 8-1 vote, with only one committee member proposing a hike to 1.0%. Behind this seemingly calm decision lie the central bank’s political dilemmas and deep market concerns. As Japanese government bond yields hit a 27-year high and the yen continues to depreciate, risks of global liquidity tightening are emerging. The subsequent comments from Governor Ueda and his team will determine the direction of the yen and even global assets.

The Central Bank’s Dilemma

Political considerations outweigh economic needs

The BOJ’s decision to keep rates unchanged appears to be driven by concerns over fiscal policy, inflation, and geopolitical risks on the surface, but the deeper logic involves political pressure. The upcoming early general election on February 8 forces the central bank to exercise caution. Previously, Prime Minister Sanae Takaichi promised to lower the consumption tax, which caused turbulence in Japan’s bond market. Clearly, the BOJ wants to avoid triggering political backlash again before the election.

However, this “wait-and-see” stance itself sends a signal. Markets are now highly alert to any hawkish signals from the BOJ, because if the bank indicates a further rate hike, it could directly impact the already fragile bond market and the yen’s exchange rate.

Why markets are sensitive to hawkish signals

According to recent data, Japan’s 30-year government bond yield has surged to 3.91%, a 27-year high. Behind this figure lies deep concern over the sustainability of Japan’s debt. Analysts warn that if Japanese interest rates continue rising to 5%, all fiscal revenue would have to be used to service debt, leading to a vicious debt cycle.

In this context, any signals of rate hikes could trigger market panic. Some analysts warn that if Governor Ueda does not clearly express a commitment to further rate increases, the yen could face renewed depreciation pressure. This creates a paradox: raising rates could worsen the debt crisis, while not raising rates could lead to continued yen depreciation.

Key Variables for Yen’s Future

The real dilemmas facing the market are:

• As a major source of global liquidity, yen depreciation threatens the stability of arbitrage trading worldwide
• Japan was once a major buyer of US Treasuries, but this support is waning as domestic interest rates rise
• Expectations of global liquidity tightening have spilled over into crypto markets, with Bitcoin briefly falling below $91,000

Global Chain Reactions

The BOJ’s policy choices extend beyond domestic boundaries. Reports indicate that panic in Japan’s bond market has spread to the cryptocurrency market. Saxo Bank’s commodities strategist notes that Japan has long been one of the most reliable sources of global liquidity; its rising bond yields suggest this support is waning, leading to a tightening of global liquidity.

This shift, combined with factors like Trump’s tariff threats, is intensifying risk aversion. Gold has hit a record high above $4,800, and capital flows in traditional financial markets are shifting.

Focus for the Next Steps

Governor Ueda’s upcoming statements will be crucial in determining the yen’s short-term trajectory. Market bets are currently on whether:

• The BOJ will hint at further rate hikes in its comments
• How it views yen depreciation
• Whether it will express concern over rising bond yields

If the BOJ signals a hawkish stance clearly, the yen could find support. However, this would also mean further tightening of global liquidity. Conversely, if the BOJ remains ambiguous, yen depreciation pressures will continue to build, but global liquidity may not face immediate larger shocks.

Summary

The BOJ’s decision to keep rates unchanged reflects a difficult balancing act between political pressure and economic realities. It’s not just a simple policy choice but a critical turning point for the global liquidity landscape. Governor Ueda’s subsequent remarks will determine whether the yen continues to depreciate and influence the direction of global asset allocation.

For market participants, the key point is to monitor the language in the BOJ’s statements regarding the yen and rate hikes, as these will directly impact expectations of global liquidity. Every word from the BOJ could trigger chain reactions from bonds to cryptocurrencies. The market is now highly sensitive, and any policy signal change warrants close attention.