The Bank of Japan's decision to maintain its benchmark interest rate at 0.75% was met with a notable split, as three policymakers expressed support for an immediate rate increase. This development has bolstered expectations of a potential hike by the end of the second quarter, with the yen responding positively and bitcoin continuing to face pressure. The central bank also revised its forecast for core inflation, now anticipating a rate of 2.8% for the current fiscal year, while adjusting its economic growth projections downward to 0.5%. The BoJ's shift towards a more hawkish stance is largely attributed to global energy price increases and their impact on inflation in energy-import-dependent economies like Japan.
Traders have promptly factored in a 74% likelihood of a rate hike on June 16, aligning with the prevailing consensus among Bank of Japan observers. The Japanese yen has surged, causing the dollar-yen pair to decline by nearly 0.5%, while the bitcoin-yen pair has fallen by 0.6%. Trends in the yen are closely monitored due to its historical role as a funding currency, with sustained strength often associated with risk aversion.
This, in turn, can trigger the unwinding of carry trades, potentially leading to global risk aversion. However, recent data suggests that yen-funded carry trades remain active, with Japan continuing to increase its holdings of U.S. Treasury notes.