The Bank of Japan's decision to maintain its benchmark interest rate at 0.75% was met with a surge in expectations for a potential hike by the end of the second quarter. The yen responded positively, while bitcoin faced downward pressure.
The central bank's decision was not unanimous, with three board members advocating for an immediate rate increase, resulting in a 6-3 vote split. This split is the largest since Kazuo Ueda became governor, indicating a growing push to raise borrowing costs. The bank also revised its forecast for core inflation to 2.8% and lowered economic growth projections to 0.5%.
Markets have priced in a 74% chance of a rate hike on June 16, aligning with the consensus among Bank of Japan watchers. The Japanese yen rose, causing the dollar-yen pair to decline nearly 0.5%, while the bitcoin-yen pair fell by 0.6%. Trends in the yen are closely watched due to its role as a funding currency, with sustained strength often associated with risk aversion. The potential for a rate hike in June may trigger concerns about another episode of yen carry trade unwind-driven global risk aversion.
However, recent data on market flows suggests that yen-funded carry trades remain active, with Japan increasing its holdings of U.S. Treasury notes.