In the Bitcoin market, all eyes this week turned to the Bank of Japan’s meeting on Tuesday, instead of the US Federal Reserve, as is often the case. Market expectation was to increase the policy rate from 0.75% to 1%. If this step is realized, interest rates in Japan will reach the highest level since 1995.
Position accumulation in yen is closely monitored
The most striking point was the speculative short positions accumulated in the yen market, rather than the increase in interest rates. According to Commodity Futures Trading Commission data, speculative short positions opened by leveraged funds in the yen exceeded 115 thousand contracts in the week ending June 9. This level was recorded as the highest level since November 2017.
These transactions are based on the expectation that the yen will continue to weaken. However, if the Bank of Japan makes the expected interest rate increase and signals additional tightening, the rapid closing of these short positions may come to the fore. In such a case, the yen may strengthen and transportation transactions based on yen borrowing may come under pressure.
Mini dictionary: Carrying means borrowing in a low-interest currency and investing in higher-yielding assets. Yen stands out in these transactions because it has been used as a low-interest financing instrument for a long time.
If the Bank of Japan signals a tighter stance in addition to the expected interest rate increase, short positions in the yen are expected to unravel, which will increase volatility in risky assets.
2024 comparison is made for Bitcoin
Analysts state that the current outlook is similar to the picture before the Bank of Japan interest rate increase at the end of July 2024. At that time, short positions in the yen reached historical high levels. The rapid closing of these positions after the interest rate increase caused the yen to appreciate sharply, and this process created significant volatility in Wall Street, the Japanese Nikkei index and the cryptocurrency market.
Following this decision, Bitcoin dropped from approximately $65,000 to $50,000 within a week. For this reason, investors are focused not only on the interest rate increase but also on the messages that Bank of Japan Governor Kazuo Ueda will give at Tuesday’s meeting. Kazuo Ueda has been governor of the Bank of Japan since 2023.
While it is possible that the markets will react to the decision with limited reaction if Ueda adopts a cautious tone, unrest in the financial markets may increase if there is a sign of tightening that is faster or may extend above 1%.
Stronger tightening signal may affect risky assets
A rapid strengthening of the yen could cause the unraveling of carries that have been thought to support global stock and bond markets for years. Some market observers consider that the same liquidity structure also provides indirect support to crypto assets.
Therefore, a harsher tightening message from Japan could create widespread fluctuations in financial markets. It is stated that Bitcoin may be one of the hardest hit instruments among crypto assets that have historically reacted more sensitively to liquidity changes.
