The Bank of Japan (BoJ) is expected to raise interest rates for the first time since January, raising the policy rate by 25 basis points to 0.75% from 0.50%, according to Nikkei. The decision, expected on Dec. 19, would take Japanese interest rates to their highest level in about 30 years.
The broader impact on global markets remains uncertain; however, developments in Japan have always been bearish for bitcoin and the broader cryptocurrency market. A stronger yen has generally coincided with downward pressure on bitcoin, while a weaker yen has tended to support higher prices. The strength of the yen 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 late November peak of just above 157.
The BoJ’s rate hike would have implications for the yen’s carry and could impact BTC via the equity channel.
For decades, hedge funds and trading desks borrowed yen at extremely low or even negative rates to finance positions in higher beta assets, primarily technology stocks and U.S. Treasuries, a strategy made possible by Japan’s prolonged period of accommodative monetary policy.
The theory therefore is that a higher Japanese rate could harm the attractiveness of these carry trades and reverse the flow of money, leading to widespread risk aversion in stocks and cryptocurrencies.
These fears are not unfounded. The BoJ’s latest hike, which took rates to 0.5% on July 31, 2024, led to the yen rally and massive risk aversion in early August, which saw BTC slide from around $65,000 to $50,000.
This time might be different
The impending rise may not lead to risk aversion for two reasons. First, speculators already hold net long (bullish) exposure to the yen, making a rapid response to the BoJ hike unlikely. By mid-2024, speculators were bearish on the yen, according to CFTC data tracked by PK Press Club.
Second, Japanese bond yields have been rising throughout this year, hitting multi-decade highs at both the short and long ends of the curve. The next increase in rates therefore reflects the catching up of official rates compared to the market.
At the same time, this week, the US Federal Reserve reduced its rates by 25 basis points, bringing them to their lowest level in three years, in addition to introducing liquidity measures. The dollar index fell to its lowest level in seven weeks.
Taken together, these elements suggest low probabilities of a “sharp unwinding of the JPY carry” and risk aversion at year-end.
That said, Japan’s fiscal situation, with a debt-to-GDP ratio of 240%, merits close monitoring next year as a potential source of market volatility.
“Under Prime Minister Sanae Takaichi, a big fiscal expansion and tax cuts are coming as inflation hovers around 3% and the BoJ keeps rates too low, still acting as if Japan is stuck in deflation. With high debt and rising inflation expectations, investors are questioning the BoJ’s credibility, JGB yields are steepening, the yen is weakening, and Japan is starting to look more like a fiscal crisis story than a safe haven,” MacroHive said in a market update.
