Analysis warned of a repeat of the 2024 yen carry-trade unwind that pressured crypto markets ahead of the next Bank of Japan interest-rate meeting.
Japan’s central bank is in focus this week as its next interest-rate meeting comes amid new 40-year yen lows against the US dollar.
Data from TradingView showed USD/JPY approaching 164 on Tuesday, just a fraction below new 40-year highs seen last week.
USD/JPY 12-month chart. Source: Cointelegraph/TradingView
The yen’s status as a funding currency is making BoJ monetary policy have an outsized influence on global markets. Japan’s currency markets are characterized by minimal capital controls and unmatched liquidity among non-dollar currencies.
Japan’s persistent current account and trade surpluses in earlier decades along with systemically low interest rates have made JPY the most important global funding currency. However, since Japanese inflation picked up in 2022, this has created the risk of carry trade unwinds accompanied by a liquidity crunch.
On Thursday and Friday, the Bank of Japan (BoJ) will decide on whether to adjust its benchmark rate, which at 1.0% is currently at its highest since 1995.
Markets expect rates to stay the same, with market-implied probabilities of a rate hold at 98%, given that policymakers enacted their latest raise in June. Prediction service Polymarket puts the odds of no change at 99% as of Tuesday.
At the time, however, the BoJ suggested that fresh hikes would come later. In a summary from the June meeting, it referenced inflationary trends in the form of the Consumer Price Index (CPI), coupled with historically low rates in place for the past three decades, as grounds for the change.
“As for the future conduct of monetary policy, given that underlying CPI inflation has been approaching 2% and financial conditions have been accommodative, it is appropriate for the Bank to continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to developments in economic activity and prices as well as financial conditions,” BoJ said.
Since then, a concurrent headwind, the weakening of the yen, has gathered pace, staying above the key 160 level against the dollar despite a dip following the June rate hike.
The BoJ previously noted the potential for a weaker yen to weigh on CPI growth, constricting consumer spending power.
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