Beware! The Bank of Japan is up to something again.

The Governor of the Bank of Japan recently hinted that he is considering raising the interest rate from 0.5% to 0.75%, which means there might be another 25 basis point hike in December. The reason is straightforward—inflation is out of control. Japan's overall inflation has surpassed the 2% target, with Tokyo's core CPI soaring to 3%, and with wages likely to rise again next spring, how can this inflation pressure be ignored?

The market nerves immediately tightened.

The tragic event from last year is still fresh in memory. On July 31, the Bank of Japan suddenly raised interest rates in a surprise move, directly increasing the rate from 0.1% to 0.25%. And what was the result? A global Black Friday, with stock markets in the US, Europe, and Asia all crashing, and the Nikkei index experiencing a circuit breaker.

Why is the destructive power so great? The core lies in the carry trade strategy. The yen has long been the cheapest source of borrowing in the world, with investors frantically borrowing yen at low interest rates and then investing in US stocks, US bonds, and Asian markets to earn the spread. When the Bank of Japan raises interest rates, borrowing costs soar, and the yen appreciates, causing the repayment costs to double. Funds are forced to flow back to Japan, and global assets suffer as a result.

However, this time the situation is a bit different.

Last time it was a sneak attack, this time it's an open warning. Since November, there have been whispers in the market that an interest rate hike might happen in December, and this speech only raised the probability from 50% to 70%. In other words, the market has already anticipated this, and prices have slowly digested it. The short-term risk is most likely localized fluctuations, not a comprehensive collapse like last year.

That being said, one still needs to have a sense of risk awareness.

The good news is that the Federal Reserve is set to cut interest rates on December 10, which can provide some reassurance to the market—there's someone to support it, so it won't spiral completely out of control. However, caution is still necessary, as the butterfly effect of the yen's interest rate hikes is unpredictable and can flap its wings quite fiercely.