The Bank of Japan's recent monetary policy decision has heightened expectations of a potential borrowing cost increase by the end of the second quarter, with the yen experiencing a surge while bitcoin faces downward pressure. The central bank maintained its benchmark interest rate at 0.75%, as expected, but 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 took office as governor, 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% from 1%.
The primary rationale behind the Bank of Japan's hawkish stance is largely attributed to energy price increases and inflationary pressures resulting from war-related disruptions in energy flows. Traders have priced in a 74% chance of a rate hike on June 16, aligning with the consensus among Bank of Japan watchers.
The Japanese yen has risen, causing the dollar-yen pair to decline by nearly 0.5%, while the bitcoin-yen pair has fallen 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 the Bank of Japan's extended period of ultra-low interest rates has encouraged traders to borrow in yen and invest in higher-yielding assets abroad. As a result, yen strength can trigger the unwinding of carry trades, potentially leading 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.