The Bank of Japan’s (BoJ) monetary policy decision on Tuesday raised expectations of a rise in borrowing costs by the end of the second quarter. The yen is loving it, while bitcoin remains under pressure.
The central bank kept its benchmark interest rate unchanged at 0.75% as widely expected. The decision was not unanimous, however, as three board members wanted to raise interest rates today.
The 6-3 split is the largest since Kazuo Ueda became central bank governor, indicating that more politicians are now pushing to raise borrowing costs.
The market price rises in June
The central bank also raised its forecast for core inflation to 2.8% for this fiscal year, while revising economic growth projections to 0.5% from 1%. The rationale behind the BoJ’s hawkish tilt is largely linked to war-related disruptions in energy flows through the Strait of Hormuz, which have pushed up global energy prices and led to inflationary pressures across energy import-dependent economies such as Japan.
Traders immediately priced in a 74% chance of a June 16 rate hike. That’s in line with the consensus among Bank of Japan watchers, who had widely expected a June hike ahead of the decision, according to Bloomberg News.
Yen jumps: Another bear relaxing shock ahead?
The Japanese yen rose, pushing the dollar-yen (USD/JPY) pair down nearly 0.5% to 158.95 (for major currencies, that’s a notable move). Interest rate increases, or expectations of them, typically support a country’s currency, in this case the yen.
The bitcoin-yen pair (BTC/JPY) listed on bitFlyer fell 0.6% to 12.28 million yen, in line with weakness in dollar-denominated prices, according to data source TradingView.
Trends in the Japanese yen are closely watched due to its long-standing role as a financing currency.
Sustained yen strength is often associated with risk aversion. This is because the Bank of Japan’s long run of ultra-low interest rates over the past decade, including the post-COVID years, encouraged traders to borrow in yen and invest in higher-yielding assets overseas.
As a result, the strength of the yen is often seen as the trigger for the settlement of these so-called carry trades. The liquidation of yen-funded positions was widely cited as a weight on global risk assets in August 2024, when bitcoin fell from $65,000 to $50,000 in a week.
It is therefore possible that growing expectations of a potential rate hike in June could renew concerns about another episode of yen carry trade settlement-driven global risk aversion.
That said, the latest available data on market flows from February suggests otherwise. Japan continued to increase its holdings of US Treasuries, indicating that yen-financed carry trades remain active.
“Japan, the largest foreign holder, raised its holdings by +$14 billion, to $1.24 trillion, the highest since February 2022. This marks Japan’s 13th monthly purchase of the past 14 months as Japanese institutions continue to chase higher yields overseas,” said the founders of the LondonCryptoClub newsletter service.
“As we have said, there is no ‘JPY carry unwind’ trade. Those who talk about it do not understand how Japanese investors operate and you should ignore them,” they added.
