Bank of Japan Set to Hike Interest Rates

The Bank of Japan (BOJ) is poised to increase interest rates for the first time since January, raising the policy rate by 25 basis points, bringing it from 0.50% to 0.75%. This decision, expected on December 19, will mark the highest interest level in Japan in nearly three decades.

The effects on global markets are unclear. Historically, developments in Japan have been bearish for Bitcoin and the wider cryptocurrency market. Typically, a stronger yen tends to exert downward pressure on Bitcoin, while a weaker yen usually supports higher prices. A strong yen can tighten global liquidity, which Bitcoin is notably sensitive to.

Currently, the yen is trading around 156 against the US dollar, having strengthened slightly from a peak of just over 157 yen in late November.

Speculations suggest that the BOJ’s interest rate hike could influence yen carry trades and subsequently impact Bitcoin through stock markets.

For years, hedge funds and trading operations have borrowed yen at very low or even negative interest rates primarily to fund investments in assets such as tech stocks and U.S. Treasuries, thanks to Japan’s prolonged easy monetary policy.

The concern is that rising interest rates in Japan could diminish the appeal of these carry trades, potentially reversing capital flows and inciting risk aversion in stocks and cryptocurrencies.

This worry isn’t entirely unfounded. The last rate hike by the BOJ, which raised rates to 0.5% on July 31, 2024, led the yen to strengthen and caused substantial risk aversion, resulting in Bitcoin’s drop from roughly $65,000 to $50,000.

Possible Differences This Time

However, the upcoming rate hike might not lead to immediate risk-off behavior for a couple of reasons. First, speculators currently hold a net long (bullish) position on the yen, making a swift reaction to a BOJ hike seem unlikely. In mid-2024, there was actually a bearish sentiment toward the yen, according to CFTC data.

Second, Japanese government bond yields have been on the rise this year, reaching multi-decade highs across both short and long ends of the yield curve. Future rate hikes could reflect a catch-up to market rates.

Meanwhile, the U.S. Federal Reserve recently enacted liquidity measures and cut interest rates by 25 basis points, the lowest in three years. As a result, the dollar index has slipped to a seven-week low.

In light of this, significant “yen carry unwinding” and year-end risk aversion seem improbable.

Nonetheless, Japan’s fiscal landscape—marked by a 240% debt-to-GDP ratio—will require close watching next year, as it could become a source of market volatility.

MacroHIVE noted, “Under Prime Minister Sanae Takaichi, significant fiscal expansion and tax cuts were executed while inflation hovered near 3%, and the BOJ maintained low interest rates, seemingly under the assumption that Japan could evade deflation indefinitely. Rising inflation expectations are leading investors to question the BOJ’s credibility, pushing up government bond yields and weakening the yen, which makes Japan appear more like a potential fiscal crisis rather than a safe haven.”