The Bank of Japan's decision to maintain its benchmark interest rate at 0.75% was accompanied by a notable split in the vote, with three members advocating for an immediate rate increase. This development has heightened expectations of a borrowing cost hike by the end of the second quarter, with the yen experiencing a boost and bitcoin facing continued pressure. 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%. The rationale behind the Bank of Japan's shift towards a more hawkish stance is largely attributed to global energy price increases and inflationary pressures.
Traders have responded by pricing 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, while the bitcoin-yen pair has also fallen. The trends in the Japanese yen are closely monitored due to its historical role as a funding currency, with sustained yen strength often associated with risk aversion. This, in turn, 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 continuing to increase its holdings of U.S. Treasury notes.