The prospects of rising interest rates are no longer just a US story. Traders are now betting that the Bank of Japan (BoJ) could also tighten interest rates, as the resource-constrained country faces inflation risks from the ongoing war in Iran.
Traders believe there is about a 69% chance the BOJ will raise its benchmark borrowing cost at the April 28 meeting, according to data tracked by Bloomberg. The movement in U.S. interest rate options shows that traders expect the Fed to increase borrowing costs in the coming weeks.
The BoJ’s policy meeting summary released Monday shows one member calling for a bigger rate hike in response to the Middle East conflict and its inflationary impact on Japanese society. The comments also noted that any decision would take into account incoming economic data and anecdotal market signals.
Fed tightening poses a well-known hurdle for risk assets, including Bitcoin. The Bank of Japan can have just as big an impact. Years of extremely low rates have encouraged traders to borrow in yen and invest in higher-yielding markets (the so-called carry trade), keeping borrowing costs at a global level and driving a rally in risky assets.
Thus, a move toward stricter policy in Tokyo could reverse these flows, impacting markets and potentially deepening the cryptocurrency bear market. The BoJ has already raised its interest rate from -0.1% to 0.75% over the past two years, while simultaneously ending its massive asset purchase program. Yet rates in Japan remain significantly lower than the 3.5% observed in the United States.
The bank therefore has plenty of room to raise rates if the Iranian crisis worsens, which could lead to higher energy prices and imported inflation in Japan and other oil-dependent countries.
Easier said than done
Raising interest rates, however, will be a difficult task given Japan’s strained fiscal situation. The country’s debt-to-GDP ratio stands at a staggering 240%, meaning higher rates could sharply increase borrowing costs and strain public finances.
Economists say Japan is caught between a rock and a hard place. If he raises rates and allows government bond yields to rise, it could endanger Japan’s debt sustainability. If it keeps rates low, the yen will likely depreciate significantly, heightening inflation fears.
Tensions are already evident in the foreign exchange market. The Japanese yen continues to weaken and is currently around 160 to the US dollar, its lowest level since mid-2024. The JPY has depreciated by 54% since 2021.
