The Bank of Japan (BoJ) is expected to raise interest rates for the first time since January, raising the policy rate by 25 basis points to 0.75% from 0.50%, according to Nikkei. The decision, expected on December 19, would push Japanese interest rates to their highest level in about 30 years.
The broader impact on global markets remains uncertain; However, developments in Japan have historically been bearish for bitcoin. and the cryptocurrency market in general. A stronger yen has generally coincided with downward pressure on bitcoin, while a weaker yen has tended to support higher prices. The strong yen tightens global liquidity conditions, to which Bitcoin is particularly sensitive.
The yen is currently trading near 156 against the US dollar, slightly stronger than its late November high of just above 157.
The BoJ rate hike is said to have implications for yen carry and could impact BTC through the equity channel.
For decades, hedge funds and trading desks have borrowed yen at ultra-low or even negative rates to fund positions in higher-beta assets, primarily technology stocks and U.S. Treasury notes, a strategy enabled by Japan’s prolonged period of loose monetary policy.
Therefore, the theory is that a higher Japanese rate could undermine the attractiveness of these carry trades and reverse the flow of money, leading to widespread risk aversion in stocks and cryptocurrencies.
These fears are not unfounded. The latest BOJ hike, which raised rates to 0.5% on July 31, 2024, sparked a yen rally and massive risk aversion in early August, causing BTC to fall from around $65,000 to $50,000.
This time it could be different
The impending rally may not trigger risk aversion for two reasons. First, speculators already maintain a net long (bullish) exposure to the yen, making a quick reaction to the BoJ hike unlikely. In mid-2024, speculators were bearish on the yen, according to CFTC data tracked by PakGazette.
Second, Japanese bond yields have risen throughout this year, reaching multi-decade highs on both the short and long ends of the curve. Therefore, the upcoming rate hike reflects that official rates are catching up with the market.
Meanwhile, this week, the US Federal Reserve cut rates by 25 basis points to a three-year low, in addition to introducing liquidity measures. The dollar index has fallen to its lowest level in seven weeks.
Together, these factors suggest low probabilities of a pronounced “JPY carry reduction” and year-end risk aversion.
That said, Japan’s fiscal situation, with a debt-to-GDP ratio of 240%, deserves close monitoring next year as a potential source of market volatility.
“Under Prime Minister Sanae Takaichi, a big fiscal expansion and tax cuts arrive as inflation hovers around 3% and the Bank of Japan keeps rates too low, still acting as if Japan is trapped in deflation. With high debt and rising inflation expectations, investors question the Bank of Japan’s credibility, JGB yields rise, the yen weakens, and Japan begins to look more like a fiscal crisis story than a safe haven,” MacroHive said in an update. of the market.
