Prospects for interest rate hikes are no longer just a US story. Traders are now betting that the Bank of Japan (BoJ) may also tighten as the resource-strapped nation faces inflationary risks from the ongoing Iran war.
Traders see a roughly 69% chance of the BoJ raising its benchmark borrowing costs at the April 28 meeting, according to data tracked by Bloomberg. Action in options linked to US interest rates shows traders expect the Fed to raise borrowing costs in the coming weeks.
The BoJ’s policy meeting summary released on Monday showed that one member called for a bigger interest rate hike in response to the conflict in the Middle East and its inflationary impact on Japanese society. Commentators also noted that any move would play into incoming economic data and anecdotal signals from the market.
Fed tightening is a well-known headwind for risk assets, including bitcoin. The Bank of Japan can have just as much influence. Years of ultra-low interest rates encouraged traders to borrow in yen and invest in higher-yielding markets (the so-called carry trade), keeping borrowing costs depressed globally and fueling increases in risk assets.
So a shift toward tighter policy in Tokyo could reverse those flows, sending ripples across markets and potentially deepening the crypto bear market. The BoJ has already raised its interest rate to 0.75% from -0.1% over the past two years, while ending its massive purchase program. Still, interest rates in Japan remain significantly lower than the 3.5% seen in the US
The bank therefore has plenty of room to raise if the Iran crisis worsens, potentially driving higher energy prices and imported inflation in Japan and other oil-dependent countries.
Easier said than done
However, raising interest rates will be a challenging task given Japan’s strained fiscal situation. The country’s debt-to-GDP ratio stands at a staggering 240%, meaning higher interest rates could significantly increase borrowing costs and strain public finances.
Economists have said Japan is caught between a rock and a hard place. If it raises interest rates and lets government bond yields rise, it could put Japan’s debt sustainability at risk. If it keeps interest rates low, the yen is likely to fall significantly, adding to inflation concerns.
Strains are already evident in the foreign exchange market. The Japanese yen continues to weaken and is currently right around 160 per US dollar, its weakest level since mid-2024. JPY is down 54% since 2021.
