The Bank of Japan's decision to maintain its benchmark interest rate at 0.75% was met with a split vote, as three policymakers advocated for an immediate rate hike. This development has heightened expectations of a borrowing cost increase by the end of the second quarter, with the yen experiencing a notable surge and bitcoin facing continued pressure.
The central bank also revised its core inflation forecast upward to 2.8% for the current fiscal year, while lowering its economic growth projections to 0.5%. Traders have swiftly priced in a 74% chance of a rate hike on June 16, aligning with the prevailing consensus among Bank of Japan observers. The Japanese yen has jumped, causing the dollar-yen pair to decline by nearly 0.5%, while the bitcoin-yen pair has fallen by 0.6%.
The trends in the yen are closely monitored due to its historical role as a funding currency, and sustained yen strength is often linked to risk aversion. This is because 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, leading to concerns about the unwinding of these carry trades. 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.