The Bank of Japan (BoJ) is expected to increase the policy rate from 0.75 to 1.0 at its 27-28 April meeting. According to the pricing in the swap markets, the probability of this move occurring is around 80 percent. In global financial markets, it is questioned whether this increase is just a technical update or whether it will trigger a widespread wave of risk aversion.
Past Examples and the Importance of Yen Transfers
Japan is one of the few major economies in the world that has implemented a negative and low interest rate environment for a long time. The BoJ, which maintained interest rates at 1 percent in the mid-1990s, then entered a period of loose monetary policy that would last for many years. During the same period, transactions called “carry trade”, in which investors borrowed money with yen at low cost and invested in higher-yielding assets, became widespread.
Yen transportation transactions can create serious capital outflows and sales pressure on risky assets in case of sudden fluctuations that cause the yen to gain value. As a matter of fact, during the sharp yen rally in August 2024, Bitcoin and Ethereum dropped by 20 percent in a short time. At that time, forced liquidations and margin calls on leveraged crypto positions became frequent. The Bank for International Settlements examined this process as an example of forced risk reduction on a macro scale.
Interest Rate Increase and Its Possible Reflections on Crypto Markets
The interest rate difference between Japan and the USA forms the basis of transportation transactions. Currently, the US Federal Reserve’s policy rate is in the range of 3.50–3.75 percent, which maintains the gap with Japan. Although the BoJ’s 25 basis point increase does not significantly change the absolute picture, it may shape investors’ expectations about the possibility of a faster tightening. Such expectations, rather than numbers, trigger the real volatility in the markets.
In leveraged carry transactions, the appreciation of the yen may cause sudden withdrawal of funds from risk assets and a sales wave in crypto markets. Especially in periods when volatility suddenly increases, digital assets such as Bitcoin can be sold as liquid collateral by macro funds and their prices can drop rapidly.
US Bond Positions of Japanese Investors and Possible Effects
Japan is the largest foreign credit provider to the United States, with a U.S. Treasury bond position of approximately $1.2 trillion. The BOJ’s interest rate hike could narrow the yield gap between Japanese bonds and US bonds. In this case, Japanese pension funds, insurers and banks may reduce their holdings of US bonds and turn to domestic assets, as in the past.
Such rebalancing could cause U.S. bond yields to rise and pressure the valuations of all risky assets in the global market, although not in the short term. This chain effect can increase the cost of Bitcoin in portfolios and reduce its demand.
Possible Scenarios for April
Three different scenarios stand out regarding the April meeting. First, the BoJ offers a cautious road map while increasing the policy rate to 1 percent and there will be no major volatility in the markets. In such a case, price movements in Bitcoin may remain limited.
Secondly, with the BoJ giving more “hawkish” guidance and giving the message of faster tightening than expected, the yen appreciates rapidly and a sharp selling wave occurs in risky assets. In such a shock, Bitcoin is likely to lose value in the 10-20 percent range.
The third and less likely scenario is that the BoJ keeps the interest rate constant and remains cautious. In this case, the yen may weaken, risk appetite increases and upward movements may come to the fore in crypto markets.
The main elements that markets should follow carefully in the coming period will be the BoJ’s decision text and forward-looking verbal guidance. In addition, volatility in the dollar/yen parity, short-term positions of investors and bond movements originating from Japan continue to be monitored. These developments are among the main factors that will determine both Bitcoin’s short-term pricing and general capital movements.
