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The Bank of Japan kept its benchmark interest rate steady at 0.75% on Friday, while raising economic growth and inflation forecasts in a decision that has major long-term implications for cryptocurrency markets.
As Japan faces a clash between monetary tightening and fiscal expansion ahead of early elections, cryptocurrency markets face increased exposure to yen-driven liquidity shifts and the possibility of canceling carry trades.
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The split vote indicates internal tension
The decision was split 8-1, with Councilor Hajime Takata expressing a single dissenting opinion in favor of raising interest rates to 1.0%. Takata argued that rising inflationary pressures and improving global economic conditions support further tightening.
The Bank of Japan raised its forecast for real GDP growth to 0.9% for fiscal year 2025 and 1.0% for fiscal year 2026, from 0.7% in the October forecast. More importantly, the central bank raised its core CPI forecast to 3.0% for 2025 and 2.2% for 2026, indicating continued inflationary pressures to come.
General inflation in December reached 2.1%exceeding the Bank of Japan’s 2% target for the 45th consecutive month – the longest streak in decades.
Political uncertainty complicates expectations
the same day, Cabinet approved Prime Minister Sanae Takaichi on a plan to dissolve the lower house of the Japanese Diet, leading to early elections scheduled for February 8.
Takaichi has put a two-year suspension of the 8% food sales tax at the heart of his campaign, in response to voters’ concerns about the rising cost of living. A poll conducted by NHK showed that 45% of respondents ranked the high cost of living as a top priority.
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His proposed record $783 billion budget for the next fiscal year has raised concerns about Japan’s fiscal trajectory. Bond yields have risen to their highest levels in decades, while the yen has fallen 4.6% against the dollar since Takaichi took office in October, currently trading around 158.97.
Structural implications for digital currencies
While Bitcoin showed no immediate reaction to Friday’s decision, the changing landscape of monetization in Japan is taking shape. Structural risks For digital currency markets.
The primary concern is about yen-financed carry trades. For years, investors have borrowed in low-yielding yen to fund positions in higher-yielding assets, including cryptocurrencies. As the Bank of Japan continues to normalize policy – with Takata’s dissent suggesting internal pressure to accelerate tightening – the risk of a surprise charge looms large.
A sharp rise in the yen, whether the result of tighter communications from the Bank of Japan or external shocks, may force leveraged investors to liquidate risk assets to cover yen-denominated liabilities. There is a historical precedent: the market turmoil in August 2024 saw the price of Bitcoin fall sharply as yen trades reversed amid speculation of a rate hike by the Bank of Japan.
The policy disparity between Japan’s gradual tightening and Takaichi’s potential fiscal expansion adds another layer of uncertainty. Rising Japanese government bond yields may attract capital into domestic fixed income, reducing global liquidity available for risk assets.
What to watch
Governor Kazuo Ueda’s press conference later on Friday will be closely watched for signals about the timing of future interest rate hikes. Markets are particularly focused on how the Bank of Japan balances its inflation-fighting mission with election-related uncertainty and recent bond market volatility.
For cryptocurrency investors, the key variables remain the rate of normalization of the Bank of Japan, the dynamics of the yen exchange rate, and any signs of stress in fiscal financial positions. While spot volatility appears to be contained, structural compositions suggest that the path of Japanese monetary policy will remain a critical macro factor for digital assets throughout 2025.
