The Bank of Japan's decision to maintain its benchmark interest rate at 0.75% was accompanied by a notable 6-3 vote split, marking the largest division since Governor Kazuo Ueda's tenure began. This development has heightened expectations of a borrowing cost increase by the end of the second quarter. As a result, the yen has appreciated, while bitcoin continues to face downward pressure. The central bank also revised its core inflation forecast upward to 2.8% for the current fiscal year and adjusted its economic growth projections downward to 0.5%.
The rationale behind the Bank of Japan's hawkish stance is largely attributed to global energy price increases, driven by disruptions in energy flows through the Strait of Hormuz, which have exacerbated inflationary pressures in energy-import-dependent economies like Japan. Traders have promptly factored in a 74% likelihood of a rate hike on June 16, aligning with the prevailing consensus among Bank of Japan observers.
The Japanese yen's ascent has led to a decline in the dollar-yen pair, while the bitcoin-yen pair has also fallen. Trends in the Japanese yen are closely monitored due to its historical role as a funding currency. Prolonged yen strength often correlates with risk aversion, as it can trigger the unwinding of carry trades.
However, recent market flow data suggests that yen-funded carry trades remain active, with Japan continuing to increase its holdings of U.S. Treasury notes.