The Bank of Japan's recent monetary policy decision has heightened expectations of a potential 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 marks the largest division since Kazuo Ueda took office as 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 driver behind the BoJ's hawkish stance is the disruption of energy flows through the Strait of Hormuz, which has driven up global energy prices and fueled inflationary pressures in energy-import-dependent economies like Japan. Following the decision, traders priced in a 74% chance of a rate hike on June 16, aligning with the consensus among Bank of Japan watchers. The Japanese yen subsequently rose, causing the dollar-yen pair to decline by nearly 0.5%. In contrast, the bitcoin-yen pair fell 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 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 concerns about it are unfounded.