On Tuesday, the Bank of Japan (BoJ) made a monetary policy decision that heightened expectations of an interest rate hike by late second quarter. The yen appreciated in response, while bitcoin continued to face downward pressure.
The central bank maintained its benchmark interest rate at 0.75%, aligning with market predictions. However, dissent was notable as three board members advocated for an immediate rate increase.
This resulted in a 6-3 vote split, the largest since Kazuo Ueda took office as governor, signaling growing support among policymakers to elevate borrowing costs.
Additionally, the BoJ adjusted its core inflation forecast upward to 2.8% for this fiscal year and lowered economic growth projections to 0.5%, down from an earlier estimate of 1%. The shift towards a more hawkish stance is attributed primarily to disruptions in energy flows through the Strait of Hormuz due to conflict, which have elevated global energy prices and contributed to inflationary pressures in economies reliant on imported energy, like Japan.
Traders assigned a 74% probability of a rate hike by June 16 following the decision. This expectation aligns with the consensus among Bank of Japan analysts, who had anticipated such an increase before the announcement, as reported by Bloomberg News.
The yen strengthened, causing the dollar-yen (USD/JPY) exchange rate to drop nearly 0.5% to 158.95—a significant movement for major currencies. Typically, rising or anticipated interest rates bolster a nation’s currency; in this instance, it was the yen.
Concurrently, the bitcoin-yen pair (BTC/JPY) on bitFlyer declined by 0.6% to 12.28 million yen, reflecting similar trends seen in dollar-denominated prices according to TradingView data.
Movements in the yen are closely monitored due to its traditional role as a funding currency. Persistent yen strength is often linked with risk aversion, stemming from Japan’s extended period of ultra-low interest rates over the past decade, including during post-COVID recovery phases, which encouraged traders to borrow in yen for investments in higher-yielding foreign assets.
Such yen appreciation can lead to the reversal of these carry trades. In August 2024, an unwinding of yen-funded positions was a contributing factor to a decline in global risk assets, including bitcoin’s drop from $65,000 to $50,000 within a week.
However, with growing anticipation for a June rate hike, concerns may arise about another cycle of yen carry trade reversals affecting global risk aversion. Nevertheless, data from February suggests otherwise, as Japan has continued to augment its U.S. Treasury holdings, indicating that yen-funded carry trades persist.
“Japan, the primary foreign holder, increased its treasury stockpile by $14 billion, reaching $1.24 trillion—a peak since February 2022. This marks Japan’s 13th consecutive monthly purchase over the last 14 months as domestic institutions pursue higher yields internationally,” noted LondonCryptoClub founders.
“There is no ‘JPY carry unwind’ trade to be concerned about. Those discussing it lack understanding of Japanese investor behavior, and their views should be disregarded,” they added.