The Bank of Japan's decision to maintain its benchmark interest rate at 0.75% was met with a split vote, as three members pushed for an immediate rate increase. This development has heightened expectations of a borrowing cost hike by the end of the second quarter, with the yen experiencing a boost and bitcoin facing downward pressure. The central bank's forecast for core inflation has been revised upward to 2.8% for the current fiscal year, while economic growth projections have been adjusted downward to 0.5%.
The likelihood of a rate hike in June is now priced in by markets at 74%, aligning with the consensus among Bank of Japan observers. The Japanese yen has risen, leading to a decline in the dollar-yen pair, while the bitcoin-yen pair has also fallen. Trends in the yen are closely monitored due to its role as a funding currency, with sustained strength often associated with risk aversion.
The potential for another unwind of yen-funded carry trades has been raised, which could lead to global risk aversion. However, recent data on market flows suggests that yen-funded carry trades remain active, with Japan continuing to increase its holdings of U.S.
Treasury notes.