The Bank of Japan (BoJ) is poised to increase interest rates for the first time since January, with expectations of a 25 basis point hike that would push the policy rate from 0.50% to 0.75%. This decision, anticipated on December 19, would mark a significant shift, bringing Japan’s interest rates to their highest level in nearly three decades.
The potential impact on global markets remains uncertain, though historical trends indicate that developments in Japan often have bearish implications for bitcoin and the broader cryptocurrency market. Specifically, a stronger yen has previously led to downward pressure on bitcoin prices, while a weaker yen has tended to support them. As liquidity conditions tighten due to yen strength, cryptocurrencies like bitcoin become increasingly sensitive to these changes.
Currently, the yen is trading around 156 against the U.S. dollar, slightly up from its recent late November peak of just above 157. The anticipated hike from the BoJ is set to influence yen carry trades and could affect bitcoin through the equities channel. For years, hedge funds and trading desks have capitalized on Japan’s ultra-low—or even negative—interest rates to finance investments in higher-risk assets, predominantly tech stocks and U.S. Treasury notes. The prospect of a higher rate from the BoJ threatens to diminish the appeal of these carry trades, potentially reversing capital flows and ushering in a period of broad risk aversion across both stock and cryptocurrency markets.
Concerns in the marketplace are not without precedent; the last rate increase by the BoJ, which raised rates to 0.5% on July 31, 2024, catalyzed a rally in the yen and triggered significant risk aversion in early August, causing bitcoin to plummet from approximately $65,000 to $50,000. However, this upcoming hike might not produce a similar risk-off reaction for a couple of reasons.
Firstly, speculators currently hold a net long (bullish) position in the yen, which dilutes the likelihood of an immediate negative response to the BoJ’s action. Notably, data from the CFTC indicates that mid-2024 saw speculators adopting bearish positions on the yen. Secondly, Japanese bond yields have risen steadily throughout this year, hitting multi-decade highs for both short- and long-term bonds. In this light, the expected rate increase can be seen as the official rates beginning to align with market realities.
In parallel, the U.S. Federal Reserve recently lowered rates by 25 basis points to a three-year low, coupled with new liquidity measures. This has resulted in the dollar index dropping to a seven-week low, suggesting reduced chances of a significant “JPY carry unwind” and year-end risk aversion.
Nevertheless, Japan’s fiscal situation is concerning, with a debt-to-GDP ratio looming at 240%. Analysts highlight the potential for market volatility, particularly in light of the current administration’s plans for substantial fiscal expansion and tax cuts amidst a backdrop of rising inflation near 3%. Critics argue that the BoJ’s continued low-rate policy, coupled with high debt levels and increasing inflation expectations, could lead investors to question its credibility, potentially steepening JGB yields, weakening the yen, and framing Japan’s economy more like a potential fiscal crisis than a safe haven. This adds a layer of complexity as market participants navigate the uncertain waters ahead.
