The Bank of Japan (BOJ) monetary policy decision on Tuesday has raised expectations that borrowing costs will rise by the end of the second quarter. The Yen is loving it, while Bitcoin is under pressure.
As widely expected, the central bank kept its benchmark interest rate unchanged at 0.75%. However, the decision was not unanimous, as three board members wanted to increase 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.
market price june rate increase
The central bank also raised the core inflation forecast for this fiscal year to 2.8%, while cutting the economic growth forecast to 0.5% from 1%. The logic behind the BOJ’s hawkish stance is largely linked to war-related disruptions in energy flows through the Strait of Hormuz, which have pushed up global energy prices and exacerbated inflationary pressures in energy-import-dependent economies like Japan.
According to Bloomberg News, traders immediately estimated there was a 74% chance of a rate hike on June 16. This is in line with the consensus among Bank of Japan watchers, who had widely expected a hike in June before the decision.
Yen Jumps: Another Carry Unwind Shock Ahead?
The Japanese yen rose, causing the dollar-yen (USD/JPY) pair to fall about 0.5% to 158.95 (for major currencies, this is a notable move). Increases in rates, or expectations of them, generally 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, according to data source TradingView, in line with weakness in dollar-denominated prices.
Given its long-standing role as a funding currency, the Japanese yen’s trends are closely watched.
Sustained yen strength is often associated with risk aversion. That’s because over the past decade, including the post-Covid years, the Bank of Japan’s long period of ultra-low interest rates encouraged traders to borrow in yen and invest in high-yield assets overseas.
As a result, the strength of the yen is often seen as the trigger to liquidate these so-called carry trades. The expiration of yen-funded positions in August 2024 was widely cited as weighing on global risk assets, when Bitcoin fell from $65,000 to $50,000 over the course of a week.
It is therefore possible that rising expectations of a potential rate hike in June could rekindle concerns about another episode of the yen carry trade, driven by global risk aversion.
That said, the latest available data on market flows from February suggests otherwise. Japan continued to increase its holdings of US Treasury notes, indicating that yen-financed carry trades remain active.
“Japan, the largest foreign holder, increased its reserves by +$14 billion to $1.24 trillion, the most since February 2022. This is Japan’s 13th monthly purchase in the past 14 months, as Japanese institutions continue to chase higher yields overseas,” said the founders of newsletter service London Cryptoclub.
He added, “As we’ve said, there is no “JPY carry unwind” trade. The people talking about it don’t understand how Japanese investors work and you should ignore them.”