The Bank of Japan Considers Interest Rate Hikes, Potentially Destabilizing Risky Assets Including Cryptocurrencies
The Governor of the Bank of Japan (BOJ), Kazuo Ueda, recently reaffirmed the central bank’s commitment to raising interest rates, a decision that could have significant consequences for risky assets, including cryptocurrencies. This statement comes as Japan’s monetary policy diverges from that of the US Federal Reserve, creating a complex economic environment for investors.
In a document submitted to a government committee led by the Prime Minister, Ueda highlighted that the Japanese economy continues to benefit from an accommodating environment. Despite a recent increase in the cost of benchmark borrowing, inflation-adjusted interest rates remain negative, leaving room for potential future hikes.
A Favorable Economic Context for Further Interest Rate Increases
The July hike, the first in decades, caused market upheaval, particularly through the liquidation of yen carry trades, thereby destabilizing several risky assets, including cryptocurrencies.
Market Reaction: Yen Strengthens, Bitcoin Falls
Kazuo Ueda’s comments immediately sparked interest in the yen, pushing the USD/JPY pair to 145.85, down from 147 previously. Simultaneously, the S&P 500 dropped by 0.5%, and Bitcoin experienced a slight decline, falling below $59,000 once again.
The divergence between the BOJ’s monetary policy and that of the Fed is particularly noteworthy. While the Fed may start cutting rates as early as September, with other global central banks potentially following suit, Japan’s tightening policy could strengthen demand for the yen. This could force investors to sell off their riskier assets and repay their yen loans, thereby amplifying volatility in global markets.
The Potential Impact of Carry Trade Liquidations on the Yen
One of the most feared effects of this situation is the liquidation of carry trades on the yen, an investment strategy whereby traders borrow in yen to invest in high-yield assets in other currencies. This practice has been massively utilized for decades due to Japan’s near-zero interest rates. However, the BOJ’s rate increases could reverse this trend, forcing investors to liquidate their positions and buy back yen, potentially having negative effects on assets such as Bitcoin.
Arthur Hayes, co-founder and former CEO of BitMEX, recently discussed this risk in a blog post. He pointed out that the expectations of rate cuts by the Fed, the Bank of England (BOE), and the European Central Bank (ECB) reduce the interest rate differential between these currencies and the yen, which could further increase pressures on risky assets if yen carry trades were to come to an end.
