The Bank of Japan's decision on monetary policy, announced on Tuesday, has heightened expectations of a potential increase in borrowing costs by the end of the second quarter. This development has had a positive impact on the yen, while bitcoin continues to face downward pressure. The central bank opted to maintain its benchmark interest rate at 0.75%, as widely anticipated. However, the decision was not unanimous, with three board members advocating for an immediate rate increase.
The 6-3 vote split marks the largest division since Kazuo Ueda assumed the role of governor, indicating a growing desire among policymakers to raise borrowing costs. The central bank also revised its forecast for core inflation upward to 2.8% for the current fiscal year and adjusted its economic growth projections downward to 0.5% from 1%. This shift in stance is largely attributed to the disruptions in global energy prices caused by the conflict, which have led to increased inflationary pressures in energy-import-dependent economies like Japan. In response to the decision, traders have priced in a 74% chance of a rate hike on June 16, aligning with the consensus among Bank of Japan observers.
The Japanese yen has appreciated, causing the dollar-yen pair to decline by nearly 0.5% to 158.95. The bitcoin-yen pair listed on bitFlyer also fell by 0.6% to 12.28 million yen, consistent with the weakness in dollar-denominated prices.
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 the Bank of Japan's extended period of ultra-low interest rates has encouraged traders to borrow in yen and invest in higher-yielding assets abroad.
As a result, yen strength can trigger the unwinding of these carry trades, potentially leading to global risk aversion. However, recent data on market flows from February suggests that yen-funded carry trades remain active, with Japan increasing its holdings of U.S. Treasury notes by $14 billion to $1.24 trillion, the highest since February 2022.