Bitcoin Under Scrutiny After Bank of Japan's Decision

Eight votes against one and no change in rates. The Bank of Japan (BoJ) has ultimately kept its key interest rate at 1% today (Friday, July 31), while hinting that its monetary tightening could resume. The yen briefly reacted before erasing its gains, while Bitcoin remained stable around $64,000. This status quo maintains a significant gap between Japanese and American rates. It temporarily protects the carry trade in yen, a cheap funding mechanism on which some open positions in risky assets depend.

Key Points

• The BoJ keeps its key interest rate at 1% by 8 votes to 1, while stating its readiness to continue normalization.
• The carry trade in yen, a source of cheap financing for risky assets, remains intact.
• Reminder from 2024: a shift from 0.1% to 0.25% caused the Nikkei to drop by 12.4% and Bitcoin to fall below $50,000.
• A public debt close to 250% of GDP limits Tokyo's room for rapid tightening.

The Bank of Japan maintains its rate, the yen remains weak

The decision was adopted by eight votes to one. Hajime Takata, the only dissenting member of the board, wanted to raise the rate immediately by 25 basis points to 1.25%. The BoJ had already raised its rate to 1% in June, its highest level since 1995.

Kazuo Ueda, the governor of the institution, nevertheless insisted on inflationary risks. The weakness of the yen increases import costs, while global demand related to artificial intelligence puts additional pressure on prices. The central bank therefore states it is ready to accelerate its hikes if its monetary conditions become too accommodative.

The market was not impressed. After an initial reaction during the press conference, the yen gave back its gains and the dollar returned to around 160.7 yen. Traders had already priced in a strong probability of a hike in the fall, which limited the impact of Kazuo Ueda's statements.

However, the situation remains delicate for Tokyo. An overly loose policy further weakens the currency and fuels imported inflation. A tightening too rapid could weaken the economy and increase the financing cost of a public debt close to 250% of GDP.

Bitcoin at $64,000, the carry trade remains intact

The maintenance of the Japanese rate preserves the carry trade in yen. This strategy involves borrowing in a currency with a low rate, then converting those funds to buy bonds, tech stocks, or more lucrative cryptocurrencies.

As long as the yen remains weak and the rate gap with the United States remains significant, investors are not forced to massively close these positions. Bitcoin thus avoids a wave of mechanical selling and trades around $63,900, with limited variation over 24 hours.

The precedent of August 2024 explains the market's vigilance. After the Japanese rate was raised from 0.1% to 0.25%, the appreciation of the yen contributed to the unwinding of many carry strategies. The Nikkei lost 12.4% in one session and Bitcoin fell from nearly $65,000 to less than $50,000. The BoJ's decision was not the sole cause of the correction, but it served as a trigger.

This time, no comparable shock has occurred. The yen remains under pressure and liquidity funded in Japan continues to circulate. However, the next rate hike could change the game: the faster or more unexpected it is, the greater the risk of forced selling on Bitcoin.

The BoJ thus offers a respite to the crypto market, not a bullish catalyst. Bitcoin holds its $64,000, but its balance remains partly suspended on the trajectory of the yen and the timing of the next Japanese tightening.