The Bank of Japan’s (BoJ) monetary policy decision on Tuesday boosted expectations of rising 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 widely expected. The decision, however, was not unanimous, as three members of the board of directors wanted to raise rates today.
The 6-3 vote split is the largest since Kazuo Ueda became central bank governor, indicating that more policymakers are now pushing to raise borrowing costs.
Markets price in June rate hike
The central bank also raised its core inflation forecast to 2.8% for this fiscal year, while revising economic growth projections downward from 1% to 0.5%. The reason behind the Bank of Japan’s hawkish tilt is largely tied to war-related disruptions to energy flows through the Strait of Hormuz, which have raised global energy prices and fueled inflationary pressures in energy import-dependent economies such as Japan.
Traders immediately priced in a 74% chance of a rate hike on June 16. This aligns with the consensus among Bank of Japan watchers, who had widely expected an increase in June before the decision, according to Bloomberg News.
Yen Jumps: Is Another Easing Carry Shock Coming?
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 increases, or expectations about them, typically support a country’s currency, in this case, the yen.
The bitcoin-yen pair (BTC/JPY) listed on bitFlyer fell 0.6% to 12.28 million yen, in line with weakness in dollar-denominated prices, according to data source TradingView.
Trends in the Japanese yen are closely monitored, given its long-standing role as a financing currency.
Sustained yen strength is often associated with risk aversion. This is because the Bank of Japan’s prolonged period of ultra-low interest rates over the past decade, including the post-COVID years, encouraged traders to borrow in yen and invest in higher-yielding assets abroad.
As a result, the strength of the yen is often seen as triggering the liquidation of so-called carry trades. The liquidation of yen-funded positions was widely cited as a factor affecting global risk assets in August 2024, when bitcoin fell from $65,000 to $50,000 over the course of a week.
Therefore, it is possible that rising expectations of a possible rate hike in June could renew concerns about another episode of global risk aversion driven by the yen carry trade.
That said, the latest available data on February market flows suggests otherwise. Japan continued to increase its holdings of US Treasuries, indicating that yen-funded carry trades remain active.
“Japan, the largest foreign holder, increased its reserves by +$14 billion, to $1.24 trillion, the highest level since February 2022. This marks Japan’s 13th monthly purchase in the last 14 months, as Japanese institutions continue to chase higher returns overseas,” said the founders of newsletter service LondonCryptoClub.
“As we have said, there is no ‘carry unwind’ operation for the JPY. Those who talk about this do not understand how Japanese investors operate and should be ignored,” they added.
