The Bank of Japan's decision on its monetary policy has heightened expectations of a potential rise in borrowing costs by the end of the second quarter. As a result, the yen has strengthened, while bitcoin has come under 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 split is the largest since Kazuo Ueda took over as governor, indicating a growing push to increase borrowing costs.
The central bank 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%. This shift towards a more hawkish stance is largely driven by the impact of global energy price increases on inflationary pressures in energy-import-dependent economies like Japan. 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% to 158.95, while the bitcoin-yen pair has fallen by 0.6% to 12.28 million yen.
The 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.
As a result, yen strength can trigger the unwinding of these carry trades, potentially leading 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.