The Bank of Japan’s (BoJ) monetary policy decision on Tuesday boosted expectations of higher borrowing costs at the end of the second quarter. The Japanese yen is in favor, while Bitcoin remains under pressure.
As widely expected by the market, the central bank kept its benchmark interest rate unchanged at 0.75%. However, the decision was not unanimous as three board members wanted a rate hike today.
The 6-3 vote split was the largest since Kazuo Ueda took over as central bank governor and suggested more policymakers are now pushing for higher borrowing costs.
Market price for interest rate hike in June
The central bank also raised its core inflation forecast for this fiscal year to 2.8%, while lowering its economic growth forecast from 1% to 0.5%. Much of the BOJ’s hawkish tilt has to do with war-related disruptions in energy flows through the Strait of Hormuz, which has pushed up global energy prices and put inflationary pressures on energy-import-reliant economies like Japan.
Traders immediately put a 74% chance of a rate hike on June 16. According to Bloomberg, this is in line with the consensus among Bank of Japan observers, who widely expected a rate hike in June before the decision.
Yen rises: Another arbitrage shock coming?
The yen’s gains pushed USD/JPY down nearly 0.5% to 158.95 (a noteworthy move for a major currency). A rate hike or the expectation of a rate hike typically supports a country’s currency, in this case the Japanese yen.
Bitcoin/Japanese yen (BTC/JPY) listed on bitFlyer fell 0.6% to 12.28 million yen, in line with weakness in U.S. dollar-denominated prices, according to data source TradingView.
Given the yen’s long-standing role as a funding currency, its movements are closely watched.
Sustained strength in the yen is often associated with risk aversion. That’s because the Bank of Japan’s prolonged period of ultra-low interest rates over the past decade, including the years following the coronavirus pandemic, encouraged traders to borrow yen and invest in high-yielding assets overseas.
Therefore, a strengthening yen is often seen as triggering the unwinding of these so-called carry trades. The unwinding of yen funding positions was widely seen as weighing on global risk assets in August 2024, when Bitcoin fell from $65,000 to $50,000 in a week.
Therefore, growing expectations for a possible interest rate hike in June may rekindle concerns about the re-emergence of the yen carry trade, triggering global risk aversion.
Nonetheless, the latest available data on market flows in February suggests otherwise. Japan continues to increase its holdings of U.S. Treasury bonds, indicating that the yen-financed carry trade remains active.
“Japan, the largest foreign holder, increased its inventories by $14 billion to $1.24 trillion, the highest level since February 2022. This marks Japan’s 13th monthly gold purchase in the past 14 months as Japanese institutions continue to chase higher yields overseas,” said the founder of newsletter service LondonCryptoClub.
“As we say, there is no ‘yen carry’ trade. Those who talk about this do not understand how Japanese investors operate and you should ignore them,” they added.