The Bank of Japan kept the policy interest rate at 0.75% on Friday. At the same time, it revised its outlook for economic growth and inflation upwards. This decision has long-term significance for the cryptocurrency market.
Japan is facing emergency elections amid a clash between monetary tightening and fiscal expansion. The cryptocurrency market is increasingly exposed to changes in yen-led liquidity and the risk of carry trade unwinding.
Internal conflicts have become apparent due to voting splits
This decision was approved by a majority of 8 to 1. Commissioner Takada cast the sole dissenting vote, arguing that interest rates should be raised to 1.0%. Commissioner Takada stated that the rise in inflationary pressures and improvements in the global economy justify additional tightening.
The Bank of Japan has revised its real GDP growth rate for FY2025 to 0.9% and FY2026 to 1.0%, up from 0.7% as of October. Notably, the forecast for the core CPI in 2025 has been raised to 3.0% and 2.2% for 2026, indicating that inflationary pressures are expected to persist.
The rise in the overall index of the consumer price index (CPI) in December was 2.1%. This has exceeded the Bank of Japan's price target of 2% for 45 consecutive months, marking the longest record in several decades.
Political instability complicates the outlook.
On the same day, Prime Minister Sanae Kishi's cabinet decided to dissolve the House of Representatives, leading to the implementation of a general election on February 8. This will initiate the shortest election campaign in history, lasting just 16 days.
Prime Minister Kishi plans to make the suspension of the 8% food consumption tax for two years a central theme of the election campaign in response to soaring prices. According to an NHK survey, 45% of respondents cited rising living costs due to yen depreciation and inflation as the most important issue.
The Prime Minister's budget proposal for the next fiscal year amounts to a record $783 billion, raising concerns about Japan's fiscal management. Government bond yields have risen to their highest levels in decades. Since taking office, the yen has fallen by 4.6% against the dollar and is currently trading around 158.97.
Structural impact on the cryptocurrency market.
Bitcoin did not show an immediate reaction to Friday's announcement, but changes in Japan's macro environment could pose structural risks to the cryptocurrency market.
The biggest concern lies in the trends of yen borrowing carry trades. Investors have long borrowed low-yielding yen to invest in high-yielding assets, including cryptocurrencies. As the Bank of Japan is advancing policy normalization, the dissenting vote from Commissioner Takada suggests internal pressure for a quicker tightening, increasing the risk of a sudden unwind of carry trades.
If hawkish statements from the Bank of Japan or external shocks lead to a rapid appreciation of the yen, leveraged investors may be forced to sell risk assets to repay yen-denominated debt. There is already a precedent for this; during the market turmoil in August 2024, carry trades were unwound due to expectations of a rate hike from the Bank of Japan, causing Bitcoin to plummet.
The policy twist of Japan's gradual monetary tightening and the possibility of fiscal expansion under Prime Minister Kishi also heightens uncertainty. If rising government bond yields encourage a return of funds to domestic bonds, global liquidity used for risk assets may decrease.
Key Point
Governor Kazuo Ueda's press conference on Friday is also garnering attention. The market will focus on how the Bank of Japan balances its mission on inflation measures amid upcoming additional interest rate hikes and recent volatility in the bond market.
For cryptocurrency investors, the speed of the Bank of Japan's policy normalization, trends in the yen's exchange rate, and signs of stress in leveraged trading are important variables. While volatility is currently contained, the direction of Japan's monetary policy is expected to remain a significant macro factor for digital assets through 2025.
