The Bank of Japan's recent monetary policy decision has heightened expectations of an interest rate increase by the end of the second quarter. As a result, the yen has strengthened, while bitcoin has come under pressure. Although the central bank maintained its benchmark interest rate at 0.75%, the decision was not unanimous, with three board members advocating for an immediate rate hike.
This 6-3 vote split is the largest since Kazuo Ueda became governor, indicating a growing inclination among policymakers to raise borrowing costs. The BoJ also revised its forecast for core inflation to 2.8% for the current fiscal year and lowered its economic growth projections to 0.5%.
The primary reason for the BoJ's hawkish stance is the disruption in global energy prices caused by war-related issues, which has led to increased inflationary pressures in energy-import-dependent economies like Japan. Markets have promptly factored in a 74% likelihood of a rate hike on June 16, aligning with the consensus among Bank of Japan observers.
The Japanese yen has risen, causing the dollar-yen pair to decline by nearly 0.5%. The bitcoin-yen pair has also fallen by 0.6%. Trends in the Japanese yen are closely monitored due to its historical role as a funding currency. Prolonged yen strength is often associated with risk aversion, as it can trigger the unwinding of carry trades.
However, recent data on market flows suggests that yen-funded carry trades remain active, with Japan continuing to increase its holdings of U.S. Treasury notes.