Japan’s Interest Rates Hit 31-Year High: Bitcoin Rises—Why Is Yen Borrowing Risk Back in Focus?

The Bank of Japan raised interest rates to 1.25%, as Bitcoin’s price against the yen increased.

The Bank of Japan (BOJ) hiked its policy rate by 25 basis points to 1.25%. The decision, reported as a 31-year high, marks the bank’s second rate hike in three months. Following the announcement, Bitcoin saw gains in both its yen pair and its dollar-denominated price.

The BTC/JPY pair trading on the Tokyo-based bitFlyer exchange rose 0.5% to 12.06 million yen. According to CoinDesk data, Bitcoin’s dollar-based price also climbed to $77,400. The price recovered from the $76,200 level seen overnight.

In contrast, the yen weakened against the dollar following the decision. The USD/JPY pair rose from 156.20 to 156.70, indicating that one dollar is trading for more yen.

BOJ decision brings carry trade risk back to the forefront

Japan’s long-standing period of low interest rates paved the way for investors to borrow in yen and turn toward higher-yielding assets. In this type of transaction, known as carry trade, investors use low-cost yen debt to finance investments in other markets.

Rising interest rates could reduce the appeal of these transactions, leading to the unwinding of positions. Market observers note that such an unwinding could exert pressure on risky assets. The sharp drop in stocks and Bitcoin at the beginning of August 2024 is cited as a recent example of this risk from the past.

The US Federal Reserve also raised its policy rate by 25 basis points this week, bringing the target range to 3.75% to 4.00%. This marked the Fed’s first rate hike since 2023. Investment banks such as Goldman Sachs and Morgan Stanley expect the Fed to implement another hike in October.