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 from 0.50% to 0.75%, as reported by Nikkei. This decision, expected on December 19, would elevate Japanese interest rates to their highest level in nearly three decades.
The potential effects on global markets remain ambiguous; however, Japan’s financial developments have historically had a negative impact on bitcoin BTC$90,040.22 and the broader cryptocurrency landscape. A stronger yen has often been associated with downward pressure on bitcoin prices, while a weaker yen generally supports price increases. The strength of the yen tends to tighten global liquidity conditions that are particularly impactful for bitcoin.
Currently, the yen is trading around 156 against the U.S. dollar, showing slight improvement compared to its late November peak just above 157.
The BoJ’s decision to raise rates could influence carry trades involving the yen and may affect BTC through equity market channels.
For many years now, hedge funds and trading desks have borrowed yen at extremely low or even negative interest rates in order to invest in higher-risk assets like tech stocks and U.S. Treasury notes—a strategy made possible by Japan’s long-standing loose monetary policy.
This leads us to theorize that an increase in Japanese interest rates might diminish these carry trade opportunities and reverse capital flows—resulting in widespread risk aversion across both stock markets and cryptocurrencies.
Such concerns are not without merit; following the last BoJ rate hike that raised rates to 0.5% on July 31, 2024, there was a significant rally of the yen accompanied by heightened risk aversion which caused BTC prices to plummet from approximately $65,000 down to $50,000 during early August.
This Time Might Be Different
The forthcoming rate hike may not trigger risk-off sentiment for two main reasons. Firstly, speculators currently hold net long positions (bullish) regarding the yen which makes an immediate adverse reaction less likely after any BoJ announcement; back in mid-2024 speculators were actually bearish towards it according to CFTC data tracked by Investing.com.
<pSecondly ,Japanese bond yields have seen consistent growth throughout this year—reaching multi-decade highs at both ends of their yield curve—which suggests that upcoming rate adjustments will align official rates more closely with prevailing market conditions.
This week also saw a reduction of U.S Federal Reserve’s benchmark rate by another quarter-point bringing it down further toward three-year lows alongside new liquidity measures being introduced . Consequently ,the dollar index has dipped down reaching levels not seen for seven weeks .
Taken together ,these factors indicate lower chances for pronounced “JPY carry unwind” scenarios leading into year-end risk aversion periods .
Nonetheless ,Japan’s fiscal circumstances—including its debt-to-GDP ratio standing at an alarming figure around240 % —merit careful observation over next year as they could become sources contributing volatility within markets overall .
“Under PM Sanae Takaichi’s leadership,a substantial fiscal expansion coupled with tax reductions arrives amidst inflation lingering near3 % while BOJ maintains overly accommodative policies treating economy as if still entrenched within deflationary environment . High levels debt combined rising inflation expectations cast doubts upon credibility surrounding BOJ operations resulting steepening JGB yields weakening Yen ultimately positioning Japan closer resembling narrative akin crises rather than safe haven ,” MacroHive remarked during recent market update .