The Bank of Japan’s (BoJ) monetary policy decision on Tuesday reinforced expectations of higher borrowing costs by the end of the second quarter. The yen loves it, while bitcoin remains under pressure.
The central bank kept its benchmark interest rate unchanged at 0.75%, as expected. The decision was not unanimous, however, since three members of the board of directors themselves wanted to increase the rates today.
The 6-3 vote split is the widest since Kazuo Ueda became central bank governor, indicating that more policymakers are now pushing to raise borrowing costs.
Markets expect rate hike in June
The central bank also raised its core inflation forecast to 2.8% this fiscal year, while revising downward its economic growth projections from 1% to 0.5%. The rationale for the BoJ’s hawkish stance is largely linked to war-related disruptions in energy flows across the Strait of Hormuz, which have driven up global energy prices and fueled inflationary pressures in energy import-dependent economies like Japan.
Traders immediately priced in a 74% chance of a rate hike on June 16. That matches the consensus among Bank of Japan watchers, who widely expected a rate hike in June before the decision, according to Bloomberg News.
The yen jumps: another outcome shock to come?
The Japanese yen rose, pushing the dollar-yen pair (USD/JPY) down almost 0.5% to 158.95 (for major currencies, this is a notable move). Rate hikes, or expectations of them, generally support a country’s currency, in this case the yen.
The bitcoin-yen (BTC/JPY) pair listed on bitFlyer fell 0.6% to 12.28 million yen, consistent with weak dollar-denominated prices, according to data source TradingView.
Developments in the Japanese yen are closely watched, given its long-standing role as a financing currency.
The yen’s sustained strength is often associated with risk aversion. Indeed, the Bank of Japan’s prolonged period of extremely low interest rates over the past decade, including the post-Covid years, has 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 unwinding of these so-called carry trades. The unwinding of yen-funded positions was widely cited as weighing 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 possible rate hike in June will reignite concerns about a new episode of yen carry trading driven by global risk aversion.
That said, the latest available market flow data from February suggests otherwise. Japan continued to increase its holdings of U.S. Treasuries, indicating that yen-funded carry trades remain active.
“Japan, the largest foreign holder, increased its holdings by +$14 billion, to $1.24 trillion, the highest since February 2022. This is Japan’s 13th monthly purchase in the last 14 months, as Japanese institutions continue to seek higher returns overseas,” said the founders of newsletter service LondonCryptoClub.
“As we said, there is no carry unwind trading in JPY. Those who talk about this don’t understand how Japanese investors work and you should ignore them,” they added.
