The Bank of Japan's decision to maintain its benchmark interest rate at 0.75% was met with a split vote, as three members advocated for an immediate rate increase. This 6-3 vote is the largest division since Kazuo Ueda took office as governor, indicating a growing push to raise borrowing costs. The central bank also revised its inflation forecast upwards to 2.8% and lowered its economic growth projections to 0.5%.
As a result, traders are now pricing in a 74% chance of a rate hike on June 16. The Japanese yen has responded positively, rising and causing the dollar-yen pair to drop nearly 0.5%. In contrast, the bitcoin-yen pair has fallen by 0.6%. The yen's strength is closely watched due to its role as a funding currency, and sustained strength is often associated with risk aversion.
This is because the Bank of Japan's prolonged period of 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 can weigh on global risk assets.
However, recent data suggests that yen-funded carry trades remain active, with Japan continuing to increase its holdings of U.S. Treasury notes.