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Key Takeaways
- Former BOJ official Tsutomu Watanabe warned the central bank could accelerate rate hikes, potentially pushing rates above 2%
- The yen has fallen 60% against the dollar since early 2021, even as Japan’s 10-year bond yield hit a multi-decade high above 2.8%
- Bitcoin and the yen have shown an unusual positive correlation, complicating theories about how faster BOJ tightening might affect risk assets
Former Bank of Japan official Tsutomu Watanabe has warned the central bank may raise its benchmark interest rate quickly this year, potentially pushing it above 2%, even as the yen continues to weaken against the dollar. The warning comes as Bitcoin and the yen have shown a strong positive correlation in recent months, a relationship market participants are watching amid expectations of faster Japanese tightening.
Watanabe Flags Risk of Faster BOJ Tightening
Watanabe, an economics professor at the University of Tokyo who left the Bank of Japan in 1999, said the central bank could accelerate its pace of rate increases this year, according to a report on the matter. The BOJ’s benchmark rate currently stands at 1% following recent hikes. He told Bloomberg:
“I believe the eventual peak in interest rates will be higher than most people currently expect. The terminal rate will be around 2%, or perhaps a little above.”
Japan’s 10-year government bond yield has climbed above 2.8%, according to data from TradingView, marking its highest level in at least three decades. The rise in long-term yields has occurred alongside, rather than in place of, the currency’s continued decline.
The Yen Continues to Weaken Despite Rising Rates
The Japanese yen has depreciated by 60% against the U.S. dollar since early 2021, trading near 162.36 per dollar, a significant decline for one of the world’s most heavily traded currencies. The yen has fallen an additional 3% so far this year, continuing a slide that recent rate increases have not reversed.
The yen’s slide to its lowest level in roughly four decades has already prompted Japanese authorities to intervene directly in currency markets, spending a record 11.7 trillion yen, or about $73.5 billion, between April and May to support the currency.
Despite that intervention, the yen has continued weakening, underscoring how difficult it has been for policymakers to reverse the trend without a shift in U.S. interest rate policy. A weaker yen has raised import costs for energy and food, squeezing Japanese households and businesses, even as it benefits exporters by making their goods more competitive abroad and boosting the value of repatriated overseas profits.
How Faster BOJ Hikes Could Affect Bitcoin
Whether accelerated BOJ tightening would support or weigh on Bitcoin remains an open question among market participants. One view holds that a sustained yen rally could unwind so-called carry trades, positions in government bonds, technology stocks and crypto assets that market participants have reportedly funded using low-cost yen borrowing. Under that scenario, an unwinding could pressure risk assets broadly, including cryptocurrencies.
Some analysts say that theory has been complicated recently by a strong positive correlation between the yen and Bitcoin, with both assets having declined against the dollar in tandem rather than moving in opposite directions as the carry-trade framework would suggest.
Bitcoin’s price has shown an unusually strong 52-week correlation with the dollar-yen exchange rate, with about 81% of its weekly moves corresponding to shifts in USD/JPY, a pattern that has recently meant Bitcoin and the weakening yen have tended to move together rather than diverge as carry-trade logic would predict.
Fiscal Strain Adds Another Layer of Uncertainty
Several economists have also raised concerns that rapid rate increases could strain Japan’s fiscal position further, given the country’s existing debt levels, though additional detail on this dynamic was not available.
The interaction between BOJ policy, the yen and risk assets like Bitcoin remains difficult to predict with confidence. Both the carry-trade unwind theory and the observed positive yen-Bitcoin correlation currently coexist as competing explanations, and it is not yet clear which dynamic would dominate if the BOJ moves faster than markets currently expect.
