According to Nikkei, 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 from 0.50% to 0.75%. The decision is expected to be made on December 19, when Japanese interest rates will rise to their highest level in about 30 years.
The broader impact on global markets remains uncertain; however, developments in Japan have historically been negative for Bitcoin and the broader cryptocurrency market. A stronger yen is typically associated with downward pressure on Bitcoin, while a weaker yen tends to support price gains. A stronger yen has led to tighter liquidity conditions around the world, to which Bitcoin is particularly sensitive.
JPY/USD is currently trading around 156, slightly stronger than its peak of just over 157 in late November.
The Bank of Japan’s rate hike is said to have an impact on yen spreads and could impact Bitcoin through the stock channel.
For decades, hedge funds and trading desks have borrowed in yen at ultra-low or even negative interest rates to finance positions in high-beta assets, mainly technology stocks and U.S. Treasuries, a strategy enabled by Japan’s long-standing loose monetary policy.
So, in theory, rising interest rates in Japan could reduce the appeal of these carry trades and reverse capital flows, leading to widespread risk aversion in stocks and cryptocurrencies.
These concerns are not unfounded. The last time the Bank of Japan raised interest rates to 0.5% on July 31, 2024, it led to a rise in the yen and massive risk aversion in early August, causing BTC to fall from about $65,000 to $50,000.
It might be different this time
The upcoming rate hike may not lead to risk aversion for two reasons. First, speculators have taken a net long (bullish) position in the yen, making it unlikely that the Bank of Japan will react quickly to a rate hike. Speculators were bearish on the yen in mid-2024, CFTC data tracked by Investing.com showed.
Second, Japanese bond yields have been rising this year, hitting multi-decade highs on both the short and long ends. The upcoming rate hike therefore reflects that official rates are catching up with the market.
At the same time, this week the Federal Reserve lowered interest rates by 25 basis points to the lowest point in three years on the basis of its liquidity measures. The U.S. dollar index has fallen to a seven-week low.
Taken together, these factors point to a clear “yen carry unwind” and low likelihood of year-end risk aversion.
Nonetheless, Japan’s fiscal position (debt-to-GDP ratio of 240%) deserves close attention as a potential source of market volatility next year.
MacroHive said in a market update: “With massive fiscal expansion and tax cuts coming under Prime Minister Sanae Takaichi, and with inflation hovering around 3%, the Bank of Japan is keeping interest rates too low, and it seems Japan is still stuck in deflation. With high debt and rising inflation expectations, investors question the Bank of Japan’s credibility, JGB yields are steep, and the yen is weakening, Japan is starting to look more like a fiscal crisis than a safe haven.”
