The Bank of Japan's recent monetary policy announcement has heightened expectations of a borrowing cost increase by the end of Q2. The yen has responded positively, while bitcoin has come under pressure. The central bank maintained its benchmark interest rate at 0.75%, but the decision was not unanimous, with three board members pushing for an immediate rate hike.
This 6-3 split is the largest since Kazuo Ueda took office as governor, indicating a growing inclination among policymakers to raise borrowing costs. The bank also revised its core inflation forecast upward to 2.8% for the current fiscal year and lowered economic growth projections to 0.5%. Markets have quickly factored in a 74% chance of a rate hike on June 16, aligning with the consensus among Bank of Japan observers.
The Japanese yen has surged, causing the dollar-yen pair to drop nearly 0.5%, and the bitcoin-yen pair has fallen by 0.6%. Trends in the yen are closely watched due to its role as a funding currency, with sustained strength often associated with 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.
As a result, yen strength can trigger the unwinding of these carry trades, potentially weighing on global risk assets. 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.