The Bank of Japan's recent monetary policy decision has heightened expectations of an interest rate increase by the end of the second quarter, with the yen benefiting from the news while bitcoin faces ongoing pressure. The central bank maintained its benchmark interest rate at 0.75%, as widely 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 Bank of Japan also revised its forecast for core inflation to 2.8% for the current fiscal year and lowered its economic growth projections to 0.5% from 1%. The primary reason behind the Bank of Japan's hawkish stance is the disruption of energy flows through the Strait of Hormuz, which has driven up global energy prices and contributed to inflationary pressures in energy-import-dependent economies like Japan. As a result, 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 rallied, causing the dollar-yen pair to decline by nearly 0.5% to 158.95, a notable move for a major currency.
In contrast, the bitcoin-yen pair has fallen 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 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 when the yen strengthens.
However, the latest available data on market flows suggests that yen-funded carry trades remain active, with Japan increasing its holdings of U.S. Treasury notes, indicating that concerns about a yen carry trade unwind-driven global risk aversion may be overstated.