Japan’s central bank lowers rate hike forecasts, alleviating a significant concern for bitcoin’s rise.

The BOJ’s dovish stance sustains the yen carry trade, the same strategy that led to a 24% decline in bitcoin over two days in August 2024.

Key points:

• Bitcoin’s rise above $74,000 was aided by the Bank of Japan’s indication that it is unlikely to increase interest rates at its April 28 meeting, alleviating macroeconomic pressures on risk assets.
• A dovish stance from the Bank of Japan keeps the yen weak and carries trade funding inexpensive, thereby supporting leveraged positions in bitcoin and other cryptocurrencies as futures open interest increases.
• If negotiations between the U.S. and Iran result in lower oil prices and diminished inflationary pressures in Japan, the central bank will have an even lesser motive to raise rates, prolonging the period during which the yen-funded carry trade can enhance bitcoin.

Bitcoin’s advance beyond $74,000 on Monday received support from Japan.

Bank of Japan Governor Kazuo Ueda tempered expectations for an interest rate increase at the upcoming April 28 policy meeting, indicating a more cautious approach amid uncertainties regarding the impact of the Iran conflict on Japan’s economy.

Such decisions have historically impacted the cryptocurrency market. On August 5, 2024, an unexpected BOJ rate hike led to a yen carry trade unwinding that caused bitcoin to plummet from $64,000 to $49,000 within 48 hours.

The carry trade, where investors borrow at low rates in yen and invest in higher-yielding assets, including cryptocurrencies, had emerged as one of the main sources of leveraged exposure to risk assets globally. A yen unwind typically triggers rapid sell-offs in risk assets, with bitcoin and major cryptocurrencies being the first to experience the effects.

However, Ueda has indicated that this trade remains intact for at least another month. Japan’s 20-year bond auction on Tuesday attracted its strongest demand since 2019, with a bid-to-cover ratio of 4.82 compared to a 12-month average of 3.27, confirming that institutional investors believe the rate hike cycle is on hold.

Twenty-year yields, which are near their highest since 1997, decreased by nine basis points after the auction.

A dovish BOJ maintains a weak yen, currently around 160 against the dollar. A weak yen allows for inexpensive carry trade funding. This affordable carry funding supports leveraged positions across risk assets, including in the perpetual futures markets where bitcoin’s rally is being established.

Data from the previous week revealed $2.1 billion in new bitcoin open interest and $2.2 billion in ether open interest within 24 hours following the ceasefire, with coin-denominated open interest confirming net new long positions. A portion of this positioning may be financed, directly or indirectly, by the same yen liquidity that Ueda has just upheld.

Japan remains one of the economies most vulnerable to developments in the Strait of Hormuz, through which over 90% of its oil imports pass.

If U.S.-Iran discussions yield an agreement and oil prices continue to decline, Japan’s inflationary pressures will further ease, providing the BOJ with even less justification to raise rates and extending the timeframe during which the carry trade supports risk assets.

Thus, the BOJ’s cautious approach serves as an additional supportive factor for bitcoin’s breakout. The $73,000 resistance held firm for six weeks, partly because macroeconomic challenges, ranging from oil prices to interest rates and geopolitical issues, gave leveraged traders no impetus to break through it.