The Bank of Japan's decision on monetary policy has heightened expectations of a borrowing cost increase by the end of the second quarter. Although the benchmark interest rate remained unchanged at 0.75%, the 6-3 vote split indicates a growing push for higher borrowing costs.
The central bank has also revised its forecast for core inflation to 2.8% for the current fiscal year and reduced economic growth projections to 0.5%. This shift has led traders to price in a 74% chance of a rate hike on June 16. The Japanese yen has responded positively, pushing the dollar-yen pair down nearly 0.5%, while the bitcoin-yen pair has fallen by 0.6%. The trends in the Japanese yen are closely watched due to its role as a funding currency, and sustained yen strength is often associated with risk aversion.
However, recent data suggests that yen-funded carry trades remain active, with Japan increasing its holdings of U.S. Treasury notes.