The Bank of Japan (BoJ) is expected to raise interest rates for the first time since January, raising the key rate by 25 basis points to 0.75% from 0.50%, according to the Nikkei. The decision, expected on December 19, will push Japanese interest rates to the highest level in about 30 years.
The wider impact on global markets remains uncertain; however, developments in Japan have historically been bearish for bitcoin and the broader cryptocurrency market. A stronger yen has typically coincided with downward pressure on bitcoin, while a weaker yen has tended to support higher prices. Yen strength tightens global liquidity conditions, to which bitcoin is particularly sensitive.
The yen is currently trading near 156 against the US dollar, slightly stronger than its peak in late November just above 157.
The BoJ rate hike is said to have ramifications for yen transmission and may affect BTC via the equity channel.
For decades, hedge funds and trading desks have borrowed the yen at ultra-low or even negative interest rates to fund positions in higher-beta assets, mostly tech stocks and U.S. Treasuries, a strategy made possible by Japan’s long period of loose monetary policy.
The theory is therefore that a higher Japanese exchange rate could weaken the attractiveness of these carry trades and reverse the flow of money, leading to broad-based risk aversion in stocks and cryptocurrencies.
This fear is not unfounded. The last BOJ hike, raising interest rates to 0.5% on July 31, 2024, led to the yen rally and massive risk aversion in early August, with BTC falling from around $65,000 to $50,000.
This time could be different
The impending rise may not lead to risk for two reasons. First, speculators already have net long (bullish) exposure to the yen, making a quick reaction to the BoJ hike unlikely. By mid-2024, speculators were bearish on the yen, according to CFTC data tracked by Pakinomist.
Second, Japanese bond yields have risen this year, hitting multi-decade highs at both the short and long ends of the curve. The upcoming interest rate increase therefore reflects that the official interest rates are catching up with the market.
Meanwhile, the US Federal Reserve this week cut interest rates by 25 basis points to a three-year low on top of introducing liquidity measures. The dollar index has fallen to a seven-week low.
Taken together, these things suggest low odds for a pronounced “JPY carry unwind” and risk aversion by the end of the year.
That said, Japan’s fiscal situation, with a debt-to-GDP ratio of 240%, warrants close monitoring next year as a potential source of market volatility.
“Under Prime Minister Sanae Takaichi, a major fiscal expansion and tax cuts arrive, while inflation hovers close to 3% and the BoJ keeps interest rates too low, still behaving as if Japan were mired in deflation. With high debt and rising inflation expectations, investors are questioning the BoJ’s credibility, the JGB yields a steeper dividend, the yen is starting to look like a safe haven for a financial crisis,” MacroHive said in a market update.
