Bitcoin traders might consider including the Japanese yen (JPY) in their list of relevant markets, moving past the dollar index, as the link between the cryptocurrency and the yen has reached an all-time high over the past 90 days.
The 90-day correlation coefficient between BTC and Pepperstone’s JPY index has increased to 0.86, the highest on record, according to TradingView data.
This significant correlation indicates that the two assets have moved closely together, with 73% of BTC’s price fluctuations over the past 90 days reflecting movements in the yen. This 73% figure – known as the coefficient of determination – is derived from squaring the correlation coefficient, demonstrating a model’s “goodness of fit” as a straightforward percentage.
Pepperstone’s JPY Index, referred to as JPYX, is a currency index contract for difference (CFD) that gauges the strength of the Japanese Yen against a basket of four major currencies: EUR, USD, AUD, and NZD.
The close correlation between bitcoin and yen means that the previously independent BTC is now influenced by Japanese currency fluctuations, either dropping or rising with the yen, as observed in the past 90 days. In essence, BTC appears to have diminished its role as a portfolio diversifier, transforming what was once regarded as a unique “digital gold” hedge into a shared bet on the yen.
Nevertheless, traders should be aware that correlations between cryptocurrencies and traditional assets like stocks and currencies can often be temporary.
BTC reached its highest point in early October, followed by a decline in the subsequent two months, as the JPY index continued its downward trend, with sell-offs in both assets halting after mid-December.
Additionally, the yen has been in a downtrend since April of last year, with concerns about fiscal debt sustainability driving up Japanese government bond yields. With the debt-to-GDP ratio of 240%, Japan stands as one of the most indebted nations globally, though most of that debt resides with domestic investors.
The elevated debt levels leave Japan’s central bank in a difficult position: raising interest rates increases debt-servicing costs and exacerbates the fiscal dilemma, while keeping rates low risks a significant drop in the yen.
Some analysts suggest that the fiscal crisis is already manifesting in currency markets, as the yen weakens sharply, and that only a potential U.S. recession could provide Japan some relief.
