The Bank of Japan's decision on its monetary policy has heightened expectations of an interest rate increase by the end of the second quarter. This development has positively impacted the yen, while bitcoin prices have dropped. The central bank maintained its benchmark interest rate at 0.75%, 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 raise borrowing costs.
The central bank also revised its forecast for core inflation to 2.8% for the current fiscal year and adjusted its economic growth projections downward to 0.5% from 1%. This shift is largely attributed to the disruptions in global energy prices caused by the conflict, which have 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 surged, causing the dollar-yen pair to decline by nearly 0.5% to 158.95. The bitcoin-yen pair has also fallen 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 prolonged period of ultra-low interest rates has encouraged traders to borrow in yen and invest in higher-yielding assets abroad. This has led to concerns about the unwinding of yen-funded positions, which could trigger 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.