Bitcoin Traders may want to add the Japanese yen (JPY) to their list of associated markets, beyond the dollar index, as the connection between the cryptocurrency and the yen has reached an all-time high over the past 90 days.
The 90-day correlation coefficient between BTC and Pepperstone’s JPY Index rose to 0.86, the highest ever, according to data source TradingView.
This high correlation means that the two assets have moved so closely in the same direction that 73% of BTC’s price movements over the past 90 days reflect movements in the yen. The 73% figure – known as the coefficient of determination – comes from squaring the correlation coefficient and shows the “goodness of fit” of a model as an intuitive percentage.
The Pepperstone JPY Index, known as JPYX, is a currency index contract for difference (CFD) that measures the strength of the Japanese yen against a basket of four major currencies, EUR, USD, AUD and NZD.
The close correlation between bitcoin and the yen means that BTC, once independent, is now in the shadow of the Japanese currency’s fluctuations, falling or rising with the yen, as it has over the past 90 days. In other words, for now, BTC appears to have lost its appeal as a portfolio diversifier, turning what was once a single hedge in “digital gold” into a double-down bet on the yen.
That said, traders should note that correlations between cryptocurrencies and traditional assets like stocks and currencies are often transient.
BTC peaked in early October and took a beating over the next two months as the JPY index extended its downward trend, with sales in both cases stopping after mid-December.
Additionally, the yen has been on a downward trend since April last year as concerns over fiscal debt sustainability pushed up yields on Japanese government bonds. With a debt-to-GDP ratio of 240%, Japan is one of the most indebted countries in the world, although much of that debt is held by domestic investors.
Japan’s high debt puts the central bank between a rock and a hard place: Raising interest rates sends debt servicing costs skyrocketing and deepens fiscal disorder, while keeping rates low risks causing the yen to plummet.
Some observers say that the budgetary crisis is already manifesting itself on the foreign exchange markets, with a significantly weaker yen, and that only a potential American recession would give Japan room to maneuver.
