The Bank of Japan's recent monetary policy decision has heightened expectations of an impending increase in borrowing costs by the end of the second quarter. The yen has responded positively, whereas bitcoin continues to face downward pressure. The central bank's decision to maintain its benchmark interest rate at 0.75% was expected, but the notable aspect was the 6-3 vote split, with three board members pushing for an immediate rate hike. This split is the largest since Kazuo Ueda took over as governor, indicating a growing inclination among policymakers to raise borrowing costs.
The central bank has also revised its forecast for core inflation to 2.8% for the current fiscal year and lowered its economic growth projections to 0.5% from 1%. The primary reason behind the Bank of Japan's hawkish stance is the disruption in global energy prices due to war-related issues, which has led to increased inflationary pressures in energy-import-dependent economies like Japan.
Traders are now pricing in a 74% chance of a rate hike on June 16, aligning with the consensus among Bank of Japan watchers. The Japanese yen has jumped, causing the dollar-yen pair to drop nearly 0.5% to 158.95, a significant move for a major currency.
The bitcoin-yen pair has also fallen 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 role as a funding currency. Prolonged yen strength is often associated with risk aversion, as it can trigger the unwinding of carry trades.
However, the latest available data on market flows suggests that yen-funded carry trades remain active, with Japan increasing its holdings of U.S. Treasury notes. According to the founders of LondonCryptoClub, 'there is no “JPY carry unwind” trade,' and those discussing it 'don’t understand how Japanese investors operate.'