The Bank of Japan's recent monetary policy decision has heightened expectations of a borrowing cost increase by the end of the second quarter, with the yen experiencing a boost and bitcoin facing downward pressure. Despite keeping its benchmark interest rate unchanged at 0.75%, the decision was not unanimous, with three board members pushing for an immediate rate hike. This 6-3 vote split marks the largest since Kazuo Ueda took office 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 economic growth projections to 0.5% from 1%. The primary reason behind the Bank of Japan's hawkish stance is attributed to energy price increases and inflationary pressures resulting from disruptions in energy flows.
Traders have promptly factored 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 nearly 0.5% to 158.95, while the bitcoin-yen pair has fallen by 0.6% to 12.28 million yen.
Trends in the Japanese yen are closely monitored due to its role as a funding currency, and sustained yen strength is often associated with risk aversion. This is because the Bank of Japan's prolonged period of ultra-low interest rates has encouraged traders to borrow in yen and invest in higher-yielding assets abroad, leading to the unwinding of these carry trades in times of yen strength. However, recent data suggests that yen-funded carry trades remain active, with Japan continuing to increase its holdings of U.S. Treasury notes.