The Bank of Japan's recent monetary policy decision has heightened expectations of a potential interest rate increase by the end of Q2. The yen has responded positively, while bitcoin continues to face downward 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 since Kazuo Ueda assumed the governorship, indicating a growing inclination among policymakers to raise borrowing costs. The central bank also revised its core inflation forecast to 2.8% for the current fiscal year and lowered its economic growth projections to 0.5%.
Markets have swiftly 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 jumped, 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 yen strength often associated with risk aversion. This, in turn, can trigger the unwinding of carry trades, which may lead to global risk aversion. However, recent market flow data suggests that yen-funded carry trades remain active, with Japan continuing to increase its holdings of U.S. Treasury notes.