The Bank of Japan (BOJ) is expected to raise interest rates for the first time since January, raising the policy rate by 25 basis points from 0.50% to 0.75%, according to the Nikkei Shimbun. The decision is expected on Dec. 19 and will send Japan’s interest rates to their highest level in nearly 30 years.
The broader impact on global markets remains uncertain. However, Japanese developments have historically been bearish for Bitcoin. BTC$90,040.22 and the broader cryptocurrency market. Typically, a stronger yen coincides with downward pressure on Bitcoin, while a weaker yen tends to support higher prices. The strong yen tightens the global liquidity situation, and Bitcoin is particularly susceptible to it.
The yen is currently trading at around 156 yen against the US dollar, slightly stronger than its high of just over 157 yen in late November.
It is said that the Bank of Japan’s interest rate hike could affect yen carry and impact Bitcoin through the equity channel.
For decades, hedge funds and trading desks have borrowed yen at ultra-low or negative interest rates to primarily fund positions in high-beta assets such as tech stocks and U.S. Treasuries, a strategy made possible by Japan’s long-term easy monetary policy.
The theory is therefore that rising Japanese interest rates could make these carry trades less attractive, reversing capital flows and leading to widespread risk aversion in stocks and cryptocurrencies.
These concerns are not unfounded. The previous Bank of Japan rate hike, which raised interest rates to 0.5% on July 31, 2024, led to a strong yen and massive risk aversion in early August, causing Bitcoin to fall from around $65,000 to $50,000.
It might be different this time
An impending rate hike may not lead to risk-off for two reasons. First, speculators already have net long (bullish) exposure to the yen, making it unlikely that there will be an immediate reaction to a BOJ rate hike. Speculators were bearish on the yen in mid-2024, according to CFTC data tracked by Investing.com.
Second, Japanese government bond yields have risen throughout this year, hitting multi-decade highs on both the short and long ends of the curve. Future rate hikes therefore reflect official interest rates catching up with the market.
Meanwhile, this week, the US Federal Reserve (Fed) introduced liquidity measures and cut interest rates by 25 basis points, the lowest level in three years. The dollar index fell to a seven-week low.
Taken together, these suggest that significant “yen carry unwinding” and year-end risk aversion are unlikely.
That said, Japan’s fiscal situation, with a debt-to-GDP ratio of 240%, will need to be closely monitored next year as a potential source of market volatility.
“Under Prime Minister Sanae Takaichi, massive fiscal expansion and tax cuts were achieved while inflation hovered near 3% and the Bank of Japan kept interest rates too low and acted as if Japan could never escape deflation. “Rising inflation expectations have investors questioning the Bank of Japan’s credibility, steepening government bond yields and weakening the yen, making Japan look more like a fiscal crisis story than a safe haven,” Macrohive said in a market update.
