In a historic move, the Bank of Japan (BOJ) has decided to end its eight-year-long negative interest rate policy, hiking the benchmark borrowing cost by 10 basis points to the 0% – 0.1% range. This decision marks a significant shift in the central bank’s monetary policy stance, which has been characterized by ultra-low interest rates and aggressive asset purchases aimed at stimulating the Japanese economy.
The BOJ’s decision not only abandons the negative interest rate regime but also scraps the yield curve control program, which had put downward pressure on global bond yields. Additionally, the central bank will cease its purchases of exchange-traded funds (ETFs) and real estate investment trusts (REITs), further unwinding its unconventional monetary policy measures.
The impact of this policy shift was immediately felt in the cryptocurrency market, with Bitcoin (BTC), the leading digital asset by market capitalization, extending its losses following the rate hike announcement. Bitcoin, often considered a macro asset, fell below $63,000 during European trading hours, adding to the declines seen earlier in the week amid reports of slowing inflows into U.S.-listed spot Bitcoin ETFs.
Traditional financial markets, however, exhibited a relatively muted reaction, with Japan’s Nikkei index paring losses, and other Asian stock markets trading mixed. Interestingly, the rate hike failed to provide a significant boost to the Japanese yen, likely because the BOJ’s policy statement did not signal further rate hikes in the coming months.
According to MUFG Bank, BOJ governor Kazuo Ueda acknowledged that persistent domestic inflation and stronger economic growth could necessitate additional rate hikes. This data-dependent approach marks a departure from the previous six years, during which the bank’s ultra-easy policy was on autopilot mode, providing a steady stream of liquidity to financial markets.
The BOJ’s shift to a data-dependent monetary policy stance could breed volatility in financial markets, as investors grapple with the uncertainty surrounding future rate decisions. Moreover, the potential for further monetary tightening by the BOJ could pose challenges for risk assets, including cryptocurrencies like Bitcoin.
For years, Japanese investors have been among the biggest exporters of capital globally, holding over $1 trillion in U.S. Treasuries and half a trillion worth of eurozone bonds, according to The Macro Compass. Additionally, the yen carry trade, which involves borrowing cheaply in yen to fund investments in higher-yielding assets, has been known to feed into risk asset markets.
As the BOJ moves away from its accommodative policy stance, the potential reduction in liquidity and the unwinding of yen carry trades could create headwinds for risk assets, including cryptocurrencies. Bitcoin, often touted as a hedge against traditional financial systems and inflationary pressures, may face increased volatility as investors navigate the implications of the BOJ’s policy shift.
While the initial market reaction to the BOJ’s rate hike was relatively muted, the long-term consequences of this policy pivot could be far-reaching. As the central bank embraces a data-dependent approach, financial markets may experience heightened uncertainty and volatility, testing the resilience of risk assets like Bitcoin in a changing monetary policy landscape.
