bitcoin strengthened as the Japanese yen fell after the Bank of Japan (BOJ) raised interest rates as expected.
Japan’s central bank raised its official short-term interest rate by 25 basis points to 0.75%, the highest level in about three decades, continuing the gradual shift away from decades of ultra-loose monetary policy.
In the policy statement, the BOJ acknowledged that inflation has remained above its 2% target for an extended period due to rising import costs and firmer domestic price dynamics. However, authorities emphasized that inflation-adjusted interest rates remain negative, implying that monetary conditions remain accommodative even after the increase.
The Japanese yen fell to 156.03 per US dollar from 155.67 following the rate decision. Bitcoin, the leading cryptocurrency by market value, rose from $86,000 to $87,500 before retreating slightly to trade near $87,000 at press time, CoinDesk data shows.
The market reaction is in line with expectations, as the rate hike had been widely anticipated. Furthermore, speculators had held long positions in the Japanese yen for weeks, preventing any sharp yen buying response following the announcement.
In recent weeks, some observers had expressed concern that rising rates could strengthen the yen, leading to reduced yen carry trades and widespread risk-averse sentiment.
For decades, Japan’s ultra-low or even negative interest rates made the yen the preferred funding currency for carry trades. Investors borrowed cheaply in yen to invest in higher-yielding assets, including U.S. technology stocks, Treasury notes and emerging-market bonds, amplifying global liquidity and risk appetite. This strategy prospered as long as Japan’s rates remained pegged near zero, effectively turning the yen into a key enabler of leverage and risk-taking in global financial markets.
So the prospect of higher rates in Japan spooked risk asset bulls. These fears, however, were overblown, as CoinDesk explained, noting that even after the rate hike, Japanese rates would remain noticeably cheaper than their US counterparts, ensuring there would be no mass unwinding of carry trades.
