The Bank of Japan's recent monetary policy announcement has heightened expectations of a potential interest rate increase by the end of the second quarter. The yen has responded positively, while bitcoin continues to face downward pressure.
The central bank maintained its benchmark interest rate at 0.75%, as widely anticipated, but the decision was not unanimous, with three board members pushing for an immediate rate hike. This 6-3 vote split is the largest since Kazuo Ueda took over as governor, indicating a growing inclination among policymakers to raise borrowing costs. The central bank also revised its core inflation forecast upward to 2.8% for the current fiscal year and lowered its economic growth projections to 0.5% from 1%.
The primary driver behind the Bank of Japan's hawkish stance is largely attributed to disruptions in global energy supplies, which have driven up energy prices and contributed to inflationary pressures in energy-import-dependent economies like Japan. Traders have quickly factored 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. This move is notable, especially for major currencies. The bitcoin-yen pair listed on bitFlyer fell 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 historical 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.
However, the latest available data on market flows from February suggests that yen-funded carry trades remain active, with Japan increasing its holdings of U.S. Treasury notes by $14 billion to $1.24 trillion, the highest since February 2022.