Japan fights against yen weakness: The Central Bank raises rates, but markets mock its expectations

The recent decision by the Bank of Japan to raise interest rates to 0.75%—the highest level in three decades—has not managed to halt the yen’s decline. In fact, the Japanese currency has hit a historic low, demonstrating that the market had already anticipated this move long before the official announcement.

Why 0.75% is not enough

Although 0.75% may seem like a significant increase historically, the reality is more complicated. Real (inflation-adjusted) rates remain negative, meaning savers are losing purchasing power. This gap between nominal rates and inflation is the factor that traders actually watch when making investment decisions.

The return of carry trades: Selling yen to seek yields

With negative real rates in Japan, traders have resumed the carry trade strategy. The mechanism is simple: borrow in yen at low cost, sell yen to obtain dollars or other currencies with more attractive rates, and invest those funds in higher-yield assets. This dynamic is exactly what has recently driven the depreciation of the yen.

The macroeconomic context adds further pressure. The unclear guidance issued by the Bank of Japan regarding future policy moves, combined with the country’s chronic debt challenges, creates uncertainty in the currency market.

Implications for Bitcoin and crypto assets

Bitcoin’s history shows a clear pattern: interest rate hikes tend to negatively impact BTC’s short-term performance. However, the situation in Japan is more nuanced. A weaker yen amplifies capital flows into assets in other currencies, potentially benefiting crypto assets.

If the USD/JPY pair reaches the level of 160, it is likely that the Bank of Japan will intervene directly in the currency markets to defend the currency. Such interventions would generate additional volatility in global markets, including Bitcoin.

To contextualize the magnitude of these movements: while 1000 yen to Brazilian reais results in an equivalent reflecting recent depreciation, the volatility of currency pairs involving the yen creates opportunities and risks for traders operating with leverage in cryptocurrencies.

Recommendations for traders

Traders should closely monitor altcoins, particularly those sensitive to international capital flows. Changes in carry trade conditions—driven by monetary policy adjustments in Japan—are often reflected in capital rotations that first affect the smaller segments of the crypto market.

The situation remains dynamic: the Bank of Japan could implement future rate hikes or currency interventions that would completely reconfigure the global investment landscape.