Bank Of Japan Could Raise Interest Rates, Sparking Further Crypto Market Fears

All eyes have been on the US Federal Reserve following Chair Jerome Powell’s pledge to lower interest rates sometime this month. This presented a bullish case for the market, leading to an impressive fightback following the August 5th global crash.

However, the focus on the USA ignores one of the biggest catalysts of last month’s crash—the Bank of Japan. 

Related: Sugar High: Arthur Hayes Predicts Bitcoin Surge, Cites US Rate Cuts and Shifts in Yen Carry Trade

Ever since some lax economic policies in the late 1980s led to a mass-scale recession, the Japanese Government has imposed a zero-percent interest rate policy to deal with the aftermath.

But with the Japanese economy running hot in 2024, the Bank of Japan (BOJ) is gearing up for a second interest rate rise in January next year – sending the nation’s cash rate above its two-decade high.

Carry Trades to Unwind and Cause Potential Mayhem 

The Japanese Government raising interest rates could spell disaster for the crypto markets – at least in the short-term.

This is because, when a country increases its cash rate, it typically strengthens the fiat dollar relative to other currencies. So when the BOJ pumps rates, the yen appreciates in value.

Thanks to Japan’s long-running zero-interest policy, the yen had become a popular asset for arbitrage and carry trades among investors globally. This is a huge deal – at its peak, the yen accounts for over US $20 trillion (AU $30 trillion) in monthly trading volume. 

So if the Japanese Government raises interest rates at the same time as other Reserve banks lower theirs, the JPY/USD pairing (and others) becomes unbalanced.

If the yen becomes too strong, thousands of investors will likely need to “unwind” their positions in carry trades – where they leverage low interest rates and invest in assets using a “cheaper” currency (in this case, the yen). The “unwinding” occurs because investors need to re-pay their yen-based debts, as the initial carry trades are no longer profitable.    

In such circumstances, risky assets are the first to go.

Market Falls on Back of BOJ News

The crypto market reacted poorly to the news, with investors clearly still scarred over last month’s 25% crash.

Related: Survey Shows Aussie Investors Shun Real Estate, Flock to Crypto as Ownership Exceeds Global Rates

Bitcoin fell 2.3% to US $57.7k (AU $86k), while the overall market sunk 2%. 

Despite the drop, Bitcoin is still sitting within its consolidation zone, and is showing no signs of trending upwards or downwards for the immediate future. 

But the Bank of Japan has officially put the crypto market on notice – and investors will track their actions over the next few months closely.