The Bank of Japan's monetary policy announcement on Tuesday has heightened expectations of a possible interest rate 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 anticipated, but the decision was not unanimous, with three board members pushing for an immediate rate hike. This 6-3 vote split is 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 forecast for core inflation to 2.8% for the current fiscal year and adjusted its economic growth projections downward to 0.5% from 1%.
The primary reason behind the Bank of Japan's hawkish stance is attributed to the disruptions in energy flows through the Strait of Hormuz, which have driven up global energy prices and contributed to inflationary pressures in energy-import-dependent economies like Japan. Traders have quickly factored in a 74% chance of a rate hike on June 16, aligning with the consensus among Bank of Japan observers who had widely anticipated a June hike prior to the decision.
The Japanese yen has risen, causing the dollar-yen pair to decline by nearly 0.5% to 158.95, a notable move for major currencies. The bitcoin-yen pair listed on bitFlyer fell by 0.6% to 12.28 million yen, consistent with the weakness in dollar-denominated prices.
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 these carry trades, which was widely cited as weighing on global risk assets in August 2024 when bitcoin fell from $65,000 to $50,000 over the course of a week.
However, the latest available data on market flows from February suggests that yen-funded carry trades remain active, with Japan continuing to increase its holdings of U.S. Treasury notes.