The Bank of Japan's recent monetary policy decision has heightened expectations of a potential borrowing cost increase by the end of Q2. The yen has responded positively, while bitcoin continues to face downward pressure. The central bank maintained its benchmark interest rate at 0.75%, as expected, but the decision was not unanimous, with three board members advocating for an immediate rate hike. This 6-3 vote split marks the largest division since Kazuo Ueda took office as governor, indicating a growing inclination among policymakers to raise borrowing costs.
The central bank also revised its core inflation forecast 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 hawkish stance is largely attributed to the disruptions in global energy prices due to the conflict-related energy flow issues through the Strait of Hormuz, which have contributed to inflationary pressures in energy-import-dependent economies like Japan.
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 strengthened, causing the dollar-yen pair to decline by nearly 0.5%. The bitcoin-yen pair also fell by 0.6%. Trends in the Japanese yen are closely watched due to its role as a funding currency.
Prolonged yen strength is often associated with risk aversion, as the Bank of Japan's extended 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 leading to global risk aversion. However, recent market flow data suggests that yen-funded carry trades remain active, with Japan increasing its holdings of U.S. Treasury notes.