When the Federal Reserve's "liquidity infusion" encounters the Bank of Japan's "tightening": the global capital covert battle behind the crypto market's sideways movement

A paradox that seems to defy financial common sense is unfolding.

In 2025, as the Fed consecutively cuts interest rates three times and its balance sheet expands again, Bitcoin has not soared as expected but has instead "laid flat" in a narrow range between $80,000 and $90,000 for half a year. Ethereum's trading volume has mysteriously shrunk by 30%, as if the entire market has hit the pause button.

This is not merely a technical adjustment but a global liquidity rebalancing that could go down in history. The market's silence stems from a capital black hole that most people overlook—Japan.

The Forgotten "Mother of Cheap Money"

Over the past twenty years, the Bank of Japan has pushed ultra-loose policies to the extreme, creating a ¥12 trillion "yen arbitrage" empire. Global hedge funds, institutional investors, and even retail traders have been enjoying this capital feast: borrowing yen at near zero cost, converting to dollars, and pouring into high-yield assets like Bitcoin and U.S. stocks, effortlessly earning interest rate differentials and capital gains.

This invisible capital forms the underlying foundation of risk assets but also harbors deadly hidden risks.

Today, Tokyo's core CPI has exceeded the 2% target for 18 consecutive months, soaring to 2.8% in November 2025, with food prices rising by as much as 38.5%. Inflation has finally torn off the mask of Japan's deflation era. Bloomberg surveys show that 100% of analysts expect the Bank of Japan to raise interest rates to 0.75% in December. The question is no longer "whether to raise rates" but "how fast" they will do it, triggering panic.

As certainty becomes consensus, arbitrage traders begin to hurriedly withdraw.

In December 2025, Bitcoin plummeted to $84,000, directly resulting from institutional selling of crypto assets to repay yen-denominated debts. The Fed's "liquidity infusion" is like pouring water into a leaky bathtub, flowing straight into Japan's enormous "water pump." The traditional theory that "loose policies push up risk assets" has completely failed at this moment.

Policy Divergence: The Most Feared Scenario for Crypto Markets

This is not the first time. The Mundell-Fleming model has long warned that, under an open economy, the coordination of central bank policies determines capital flows.

• In 1998, Fed rate cuts combined with Japan's tightening, during the Asian financial crisis, led to a massive capital flight;

• In 2022, the Fed aggressively raised rates while Japan maintained YCC, causing the yen to depreciate by 30%, and the crypto market to crash 60% due to liquidity drying up in USD;

• Now, history is replaying in a mirror image— the Fed's easing is less than expected (rate cuts in 2025 are 50 basis points slower than market expectations), while the "water pumping" effect of the Bank of Japan is even more destructive.

As the risk curve reaches its tail, the crypto market is most sensitive to liquidity changes. Data from Gate shows that in 2025, crypto leverage has fallen to 2.3x, a three-year low. Institutions are not waiting for a "trigger," but proactively avoiding risks. This cautious stance is a rational response to policy uncertainty.

The Threefold Rebuilding of the World After Rate Hikes

If the Bank of Japan raises rates as scheduled, the global market will undergo a once-in-a-century reshuffle:

First: Exchange Rate Tsunami. The yen may experience its strongest appreciation since 1998, with USD/JPY falling below 130, and emerging market currencies will face a chain devaluation. This is not a forecast but an inevitable result of arbitrage reversal.

Second: Capital Migration. The yen unwinding wave will continue to suppress the crypto and U.S. tech stocks, while Japanese government bonds and blue-chip stocks will become the new favorites of global capital. Morgan Stanley boldly predicts that the Japanese stock market could rise 15% in 2026.

Third: Polarization in Crypto Markets. Bitcoin, with its "digital gold" attribute, may show stronger resilience, while altcoins lacking fundamentals could face over 40% bloodbaths. When rate hike expectations heated up in August 2024, altcoins index already fell twice as much as Bitcoin; this time, it will be even more brutal.

The deeper impact is that the global liquidity dominance will shift from a "unipolar" Fed to a "bipolar" US-Japan system— the most significant monetary policy paradigm shift since the Plaza Accord of 1985.

Finding New Anchors Amid Pain

History repeatedly proves that liquidity restructuring during policy divergence is often accompanied by severe pain.

• In 1998, Long-Term Capital Management's yen arbitrage collapse triggered a global financial shock;

• In 2013, the "taper tantrum" caused the Fed's policy shift, leading to over $500 billion in capital outflows from emerging markets.

The current sideways movement in crypto markets is precisely the market digesting these potential risks in advance. Leverage is retreating, speculative bubbles are deflating, and the market is undergoing a painful "blood transfusion."

But there is always a dawn behind the clouds. As the Fed's easing cycle continues and Japan's normalization completes, global liquidity will eventually find a new equilibrium. When that happens, the driving force behind crypto will shift from "policy speculation" to "value creation"— real use cases, spot demand, and technological innovation dividends will replace fragile leverage capital, becoming the true engines of the next cycle.

Conclusion: Choices in the Eye of the Storm

This liquidity tug-of-war is essentially the inevitable pain of the global shift from "unilateral easing" to "multi-dimensional game." The market's silence is not death but a recalibration of valuation anchors amid policy fog.

History won't repeat exactly, but it rhymes. When the Bank of Japan's rate hike finally lands, short-term volatility is unavoidable, but long-term value will ultimately return. For each of us participating, rather than predicting when the storm will end, it is better to think about how to survive and position ourselves within it.

What are your thoughts on this covert global capital battle? Do you believe Bitcoin can consolidate its "digital gold" status amid this reshuffle? Feel free to share your views in the comments. If you find this article offers a unique analytical perspective, please like, share with friends, and follow us @CryptoGoldDigger for in-depth macro insights into the global market.

After all, in the world of capital, knowledge gaps equal wealth gaps.