Crypto Markets Hold Steady Despite Japan's Historic Interest Rate Hike

Crypto markets held steady on Tuesday even as Japan lifted interest rates to a three-decade high amid rising domestic inflation.

The Bank of Japan’s policy board raised its benchmark interest rate to around 1% in a 7-1 vote, with the new guideline effective June 17. Policymakers flagged a risk of inflation rising above a 2% target as higher oil prices feed through to consumer goods, with further hikes expected.

A relief rally lifted crypto markets after President Trump announced a deal with Iran over the weekend, easing the tensions which the Bank of Japan had tied to rising oil prices. The deal moved Bitcoin above $65,000 from the low $60,000s. A signing is expected on Friday.

At time of publication, Bitcoin is trading around $66,000, down 1.1% on the day, per CoinGecko data. Traders on prediction market Myriad, owned by Decrypt’s parent company Dastan, remain predominantly bearish on its outlook, placing a 64% chance on Bitcoin’s next move taking it to $55,000.

Japan's economy has “recovered moderately” despite weakening factors tied to the Middle East, with strong corporate profits and a firmer job market cushioning the strain on activity, the central bank stated.

The country’s broader economy is expected to align with the “baseline scenario” for moderate growth, “albeit at a decelerated rate," the guidance reads, pointing at government measures to soften energy costs that could ease the risk of a sharp slowdown.

Tuesday’s quarter-point move to 1% lifted Japan's benchmark rate to its highest in over three decades, a level last reached in 1995.

The Yen carry trade and crypto

Bank of Japan rate hikes have long pressured crypto by unwinding the yen carry trade, where investors borrow cheap yen to buy higher-yielding assets abroad and profit on the rate gap while the currency stays weak.

Still, Bitcoin and the broader crypto market held steady despite Tuesday's rate hike, even as traders appeared to have braced for a selloff.

Crypto's total market cap held around $2.34 trillion, down 1.4% on the day, according to CoinGecko data. Open interest in Bitcoin futures eased over the prior day, per CoinGlass data, suggesting traders had pulled back from leveraged positions, leaving little room for a selloff to unwind.

“The Yen carry trade has failed to trigger any meaningful disruption in either crypto or global equities this time around,” Ryan Yoon, senior analyst at Tiger Research, told Decrypt.

Memory of the previous carry trade scare is "still incredibly fresh," Yoon said, and investors “refused to panic” because the market appears to have “fully recovered” from that earlier shock.

Decades of low and negative rates have propped up global markets, and Japan now carries public debt above 200% of GDP, the largest load among advanced economies, per IMF data.

The yen carry trade would remain to be "just another headline" unless Japan's shift drains liquidity from the U.S. market, Yoon said. Once the market processes a narrative and realizes “the sky isn't falling,” that scare “loses its power to move prices,” he added.

Japan's hike had less importance to the market now, given how “it's been priced in before,” Maksim Balashevich, founder and CEO of Santiment, told Decrypt.

“The ‘unknown’ events of the future, which aren't fully priced in and able to move markets significantly, must be some other pieces of unveiling reality,” he added.