The Bank of Japan (BoJ) is anticipated to increase interest rates for the first time since January, raising the policy rate by 25 basis points to 0.75% from 0.50%, as reported by Nikkei. This decision, expected on December 19, would bring Japanese interest rates to their highest in about three decades.
The potential repercussions for global markets are unclear; however, changes in Japan have historically been bearish for bitcoin and the broader cryptocurrency market. A stronger yen has often associated with downward pressure on bitcoin, while a weaker yen has been favorable for price increases. Yen strength restricts global liquidity conditions, to which bitcoin is especially responsive.
The yen is currently trading around 156 against the U.S. dollar, somewhat stronger than its late November peak of just above 157.
The anticipated BoJ rate hike is predicted to affect the yen carry and could influence BTC through the equities channel.
For many years, hedge funds and trading desks have leveraged yen at ultra-low or negative rates to fund positions in higher volatility assets, primarily tech stocks and U.S. Treasury notes, a strategy made possible by Japan’s lengthy period of easy monetary policy.
Thus, the idea is that a rise in Japanese rates could diminish the appeal of these carry trades and reverse the money flow, inciting widespread risk aversion among stocks and cryptocurrencies.
Such concerns are not without merit. The last BoJ hike, which elevated rates to 0.5% on July 31, 2024, prompted a yen rally and significant risk aversion in early August, causing BTC to drop from around $65,000 to $50,000.
This time could be different
The forthcoming hike may not induce risk-off behavior for two key reasons. First, speculators currently possess net long (bullish) exposure in the yen, making an immediate reaction to the BoJ hike improbable. In mid-2024, speculators were bearish on the yen, based on CFTC data monitored by Investing.com.
Secondly, Japanese bond yields have surged throughout this year, reaching multi-decade highs at both ends of the curve. The expected rate hike, therefore, indicates that official rates are aligning with market movements.
In addition, this week, the U.S. Federal Reserve lowered rates by 25 basis points to a three-year low while also implementing liquidity measures. The dollar index has fallen to a seven-week low.
Considering these factors, there are low chances for a pronounced “JPY carry unwind” and year-end risk aversion.
However, Japan’s fiscal landscape, characterized by a debt-to-GDP ratio of 240%, requires close attention next year as a possible source of market volatility.
“Under PM Sanae Takaichi, significant fiscal expansion and tax reductions are expected as inflation hovers near 3% and the BoJ maintains low rates, still operating as if Japan is mired in deflation. With high debt and escalating inflation expectations, investors are beginning to question the credibility of the BoJ, leading to steepening JGB yields, a weakening yen, and Japan appearing more like a fiscal crisis narrative rather than a safe haven,” MacroHive stated in a market update.
