- The BOJ hiked the benchmark borrowing cost by 10 basis points, abandoning the prolonged negative interest rate policy.
- Bitcoin extended losses following the rate hike even as the yen remained under pressure.
- The new data-dependent BOJ could breed volatility and discourage the yen carry trades that are known to feed into risk assets.
The Bank of Japan (BOJ) lifted its benchmark interest rates above zero on Tuesday, ending an eight-year regime of sub-zero borrowing costs without causing an expected panic in the financial market.
The central bank voted to raise the benchmark interest rate to the 0% - 0.1% range, abandon the yield curve control program that puts downward pressure on global bond yields, and stop purchases of exchange-traded funds and real estate investment trusts.
Bitcoin (BTC), the leading cryptocurrency by market value and a macro asset, extended losses following the BOJ’s rate decision, falling to under $63,000 during European trading hours. Bitcoin started falling on Monday amid reports of a slowdown in inflows into the U.S.-listed spot exchange-traded funds (ETFs).
Traditional markets, however, held relatively steady, with Japan’s Nikkei index paring losses and other Asian stock markets trading mixed. The rate hike also failed to put a bid under the Japanese yen, probably because the policy statement did not signal more rate hikes in the coming months.
According to MUFG Bank, BOJ governor Kazuo Ueda acknowledged that sticky domestic inflation and/or stronger economic growth could dictate more rate hikes. Essentially, the central bank’s future course of action depends on the incoming data as opposed to the previous six years when the bank's ultra-easy policy was on autopilot mode.
Further monetary tightening by the BOJ could bring pain to risk assets, including cryptocurrencies. (Perhaps BTC is already pricing that). For years, Japanese investors have been amongst the biggest exporters of capital in the world, owning over $1 trillion in treasuries and half a trillion worth of euro zone bonds, according to The Macro Compass.
Besides, the liquidity created from cheap Japanese yen through carry trades has been known to feed into risk assets. The yen-carrying trade involves borrowing cheaply in yen to fund bets in high-yielding assets.
“The BOJ is now essentially data-dependent, which is a big change in the BOJ reaction function and opens up the scope for greater FX volatility that should discourage a further build-up of yen carry positions at these weaker yen levels. Import inflation is again picking up, and government subsidies that are helping to depress inflation will end on April 30," Derek Halpenny, head of research, global markets at MUFG Bank, said in a note sent to clients after the rate hike.