The Bank of Japan's decision on Tuesday has heightened expectations of an interest rate hike by the end of the second quarter. The yen has responded positively, while bitcoin continues to face 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 advocating for an immediate rate hike. The 6-3 vote split is the largest since Kazuo Ueda took office as governor, indicating a growing inclination among policymakers to increase borrowing costs.
Markets have priced in a 74% chance of a rate hike on June 16, aligning with the consensus among Bank of Japan observers. The Japanese yen has risen, 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 fell by 0.6% to 12.28 million yen, consistent with the decline in dollar-denominated prices. Trends in the Japanese yen are closely monitored due to its 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. Consequently, yen strength can trigger the unwinding of carry trades, which may lead to global risk aversion.
However, recent data on market flows suggests that yen-funded carry trades remain active, with Japan increasing its holdings of U.S. Treasury notes. According to the founders of LondonCryptoClub, "Japan, the largest foreign holder, raised its stockpile by +$14 billion, to $1.24 trillion, the highest since February 2022. This marks Japan's 13th monthly purchase of the last 14 months, as Japanese institutions continue chasing higher yields overseas." They also stated, "As we have said, there is no ‘JPY carry unwind’ trade.
Those who are talking about that don’t understand how Japanese investors operate and you should ignore them."