Three Bank of Japan members call for a rate hike; yen rises while bitcoin falls

Markets are pricing in a June rate hike after a split BoJ vote that saw three policymakers dissent in favor of a hike.

The Bank of Japan’s (BoJ) monetary policy decision on Tuesday boosted expectations of a hike in borrowing costs by the end of the second quarter. The yen is loving it, while bitcoin remains under pressure.

The central bank kept its benchmark interest rate unchanged at 0.75% as widely expected. The decision, however, wasn't unanimous, as three board members wanted to hike rates today itself.

The 6–3 vote split is the largest since Kazuo Ueda became governor of the central bank, indicating that more policymakers are now pushing to raise borrowing costs.

Markets price June rate hike

The central bank also raised its forecast for core inflation to 2.8% for this fiscal year, while revising economic growth projections lower to 0.5% from 1%. The rationale behind the BoJ’s hawkish tilt is largely tied to war-related disruptions in energy flows through the Strait of Hormuz, which have pushed up global energy prices and fed into inflationary pressures across energy-import-dependent economies like Japan.

Traders immediately priced in a 74% chance of a rate hike on June 16. That aligns with the consensus among Bank of Japan watchers, who had widely expected a June hike ahead of the decision, according to Bloomberg News.

Yen jumps: Another carry unwind shock ahead?

The Japanese yen rose, pushing the dollar-yen (USD/JPY) pair down nearly 0.5% to 158.95 (For major currencies, that’s a notable move). Rate hikes, or expectations of them, typically support a country’s currency, in this case, the yen.

The bitcoin-yen pair (BTC/JPY) listed on bitFlyer fell by 0.6% to 12.28 million yen, consistent with the weakness in the dollar-denominated prices, according to data source TradingView.

Trends in the Japanese yen are closely watched, given its long-standing role as a funding currency.

Sustained yen strength is often associated with risk aversion. This is because the Bank of Japan’s prolonged period of ultra-low interest rates over the past decade, including the post-COVID years, encouraged traders to borrow in yen and invest in higher-yielding assets abroad.

As a result, yen strength is often seen as triggering the unwinding of these so-called carry trades. The unwinding of yen-funded positions was widely cited as weighing on global risk assets in August 2024, when bitcoin fell from $65,000 to $50,000 over the course of a week.

It is therefore possible that growing expectations of a potential rate hike in June could renew concerns about another episode of yen carry trade unwind-driven global risk aversion.

That said, the latest available data on market flows from February suggests otherwise. Japan continued increasing its holdings of U.S. Treasury notes, indicating that yen-funded carry trades remain active.

"Japan, the largest foreign holder, raised its stockpile by +$14 billion, to $1.24 trillion, the highest since February 2022. This marks Japan's 13th monthly purchase of the last 14 months, as Japanese institutions continue chasing higher yields overseas," the founders of newsletter service LondonCryptoClub said.

"As we have said, there is no “JPY carry unwind” trade. Those who are talking about that don’t understand how Japanese investors operate and you should ignore them," they added.

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