The significant drop in August has been linked to the long-awaited interest rate hike and the possibility of further increases. This development could negatively impact the performance of cryptocurrencies in the final quarter, compelling investors to pay close attention to the Bank of Japan, alongside the Federal Reserve. So, what did the Bank of Japan President recently disclose?
Bank of Japan’s Stance and Cryptocurrencies
Bank of Japan President Kazuo Ueda has indicated that interest rates may rise again if economic and inflationary trends align with projections. A government panel, led by Prime Minister Fumio Kishida, received a document suggesting that the current economic environment could justify additional rate hikes. Despite the increase at the end of July, inflation-adjusted interest rates remain negative, according to the central bank.
For decades, Japan avoided raising interest rates, but the recent move has shaken risk assets. Meanwhile, central banks around the world have begun to cut interest rates. The US Federal Reserve plans to announce a 25-basis-point cut on September 18.
Potential Impacts on Global Markets?
If Japan continues to diverge from global trends, it could lead to a significant depreciation of the dollar against the yen. The yen is commonly utilized in risk credits, making loan repayments challenging amidst currency fluctuations. Companies and citizens with yen-denominated loans in countries facing currency volatility have previously experienced similar difficulties.
Concrete Implications of the Rate Hike
– Investors should closely monitor the Bank of Japan’s policy changes for potential market shifts.
– A depreciating dollar against the yen could lead to increased loan repayment difficulties.
– The yen carry trade may unravel, posing significant risks to various asset classes.
– Central banks globally may react to Japan’s interest rate hikes, potentially causing widespread financial repercussions.
What’s Next for Cryptocurrencies?
BitMEX co-founder and former CEO Arthur Hayes has underscored this issue. In his latest market analysis, he emphasizes that the potential unwinding of the yen carry trade represents a growing risk for cryptocurrencies.
“The danger of the yen carry trade unraveling will re-emerge, and unless the central bank expands its balance sheet by printing money, it could spoil the celebration,” Hayes stated.
Carry trade involves purchasing a low-cost asset to invest in a higher-yielding one. In Japan, where interest rates have been near zero for almost two decades, investors were driven to borrow. This influx of funds into high-yield assets reached significant levels. As of October 2023, Deutsche Bank reports a $20 trillion carry trade, which, if disrupted, could impact all risk assets, stock markets, and more.
