Investor attention this week shifts to Japan, where the central bank will discuss monetary policy as the yen weakens against the US dollar to levels not seen in approximately 40 years. Although the market almost unanimously expects interest rates to remain at current levels, the bigger problem is the future direction of its policy. It is the changing conditions in Japan that could threaten the popular “yen carry trade” strategy, whose abrupt unwinding in 2024 hit bitcoin and altcoins hard.
Don’t miss: Binance seeks new MiCA license in the EU
Japanese yen at extreme lows and the central bank’s dilemma
The USD/JPY exchange rate has approached the 164 yen per dollar mark, representing the yen’s lowest values in roughly 40 years. This extreme currency weakness puts the Bank of Japan (BoJ) in a very complex situation. The Japanese yen is among the world’s most important funding currencies – thanks to persistently low rates, investors have massively borrowed cheap capital and moved it into higher-yielding assets abroad.
Given that inflation in the country has intensified since 2022, the central bank must gradually abandon its extraordinarily cheap money policy. While it currently holds the base rate at 1%, the highest since 1995, and the market does not expect a change this week, signals regarding further tightening will be crucial. Normalization of Japanese monetary policy is imminent, as underlying inflation is heading toward 2% and financial conditions remain relatively loose even after the previous rate hike.
The weak currency also increases prices of imported goods, which further pressures domestic inflation and limits the purchasing power of Japanese consumers. For global markets, this long-term upward direction of rates is far more important than the question of whether the next move will occur in September, October, or December. The era of cheap money is simply ending, and it is at this point that the situation becomes critical for the cryptocurrency market.
Read also: yPredict: Revolutionary platform for cryptocurrency prediction
Why should bitcoin closely monitor the Japanese currency?
The key to the entire problem is a mechanism called carry trade. An investor borrows yen at low interest and invests the obtained capital into riskier assets with higher returns, such as bonds, stocks, or cryptocurrencies, thereby indirectly increasing liquidity in the digital asset market. However, if Japanese rates rise or the yen begins to strengthen sharply, the profitability of this strategy quickly collapses. Investors must then rapidly close their positions, sell purchased assets, and repay debts in yen.
The year 2024 has already clearly shown how this forced deleveraging can, due to its high speed, drain liquidity and send bitcoin and altcoins into a sharp decline.
While the rate decision itself will likely bring no surprises, the central bank’s communication and the yen’s subsequent reaction could significantly move markets. If any hawkish comments trigger a rapid yen strengthening, a domino effect in the form of a massive sell-off of risky assets threatens. For bitcoin, the crucial question is not the current cosmetic rate adjustment, but whether investors will begin to believe that the era of extremely cheap Japanese capital is definitively ending faster than previously expected. If this happens, cryptocurrencies will feel a hard impact even without any immediate action from the BoJ.
Don’t overlook: BITmarkets.com: Crypto exchange review rewriting the rules
