BOJ may hike rates above 2% as yen slide complicates bitcoin outlook

The Bank of Japan may raise its benchmark interest rate above 2% this year, a former central bank official warned, as the yen's 60% slide since early 2021 continues.

"The BOJ could be forced to accelerate tightening as the yen keeps weakening, potentially pushing borrowing costs above 2%," Tsutomu Watanabe, an economics professor at the University of Tokyo who left the central bank in 1999, told Bloomberg.

The BOJ's benchmark rate stands at 1% after a 25-basis-point hike on June 16, the highest since 1995. The 10-year Japanese government bond yield has climbed above 2.8%, the highest in more than three decades, according to TradingView. The yen continues to slide, trading at 162.36 per dollar and falling 3% this year.

The question for crypto markets is whether faster BOJ tightening helps or hurts bitcoin. A sustained yen rally could trigger an unwinding of carry trades funded by years of cheap yen borrowing, potentially dragging down risk assets including crypto. That theory has been undercut by the strong positive correlation between the yen and bitcoin, which hit 0.90 over the past 52 weeks, according to CoinDesk.

The Carry Trade Paradox

The traditional view holds that a stronger yen spells trouble for risk assets. Investors who borrowed cheaply in yen to fund bets on US tech stocks, government bonds, and crypto would be forced to unwind those positions as borrowing costs rise. That dynamic played out in August 2024, when the BOJ's rate hike triggered a global equity selloff and sent bitcoin tumbling.

This time may be different. Bitcoin and the yen have moved in lockstep, both falling against the dollar. A stronger yen, under this framework, could correlate with a stronger bitcoin — the opposite of the carry trade unwind narrative.

Japan's Fiscal Constraints

Rapid rate hikes carry their own risks. Several economists have warned that faster tightening could worsen Japan's fragile fiscal position, given the country's debt-to-GDP ratio is the highest among developed nations. The BOJ's hawkish minority pushed for faster tightening in the June vote, and if inflation data gives them ammunition, the consensus could shift quickly.

For now, the BOJ's next moves remain uncertain. The yen's trajectory, Japan's fiscal health, and global risk appetite will all factor into whether the central bank delivers on Watanabe's warning — and whether bitcoin benefits or suffers from the outcome.

This article is for informational purposes only and does not constitute investment advice.