Skip to main content

Amidst the final phases of the Federal Reserve’s tightening cycle, all eyes are now on the Bank of Japan (BOJ) and its anticipated influence on global market flows. Griffin Ardern, a volatility trader at the crypto asset management company, Blofin, highlights the BOJ’s unpredictability.

“I think the BOJ will be the most significant uncertainty factor in the future. Whether it is the Fed or the ECB, their policy paths have been clear, but the BOJ is not, which means that the BOJ is likely to ‘surprise’ us beyond expectations,” Ardern commented.

For the past few years, starting in 2016, the BOJ has maintained short-term interest rates at negative 0.1% and kept the 10-year government bond yield close to 0% under its yield curve control (YCC) strategy. Additionally, the bank has allowed an elasticity band of 0.5% above and below the 10-year yield target. In a recent move in July, it permitted the yield to surpass the upper limit, given it remains under 1.0%.

These liquidity-enhancing measures have consistently exerted a downward force on global bond yields, injecting trillions into global liquidity. The continuation of such easing policies has amplified the popularity of carry trades, where yen is borrowed to be invested in high-yielding risk assets.

However, the BOJ’s potential decision to pull back on its negative interest rate policy and the YCC might empower the Japanese yen (JPY). This could reverberate across risk assets, encompassing cryptocurrencies. The tightening phases led by the Fed, ECB, and their counterparts appear to have maxed out. But, the BOJ’s stance on rates remains unchanged.

Ardern further elaborated, “Once the BOJ begins unwinding the ultra-easy policy, many assets previously obtained through the JPY-USD arbitrage channel [carry trade] may be sold off to repay debt denominated in JPY. That, in turn, may have an unexpected impact on the crypto market.”

Earlier in the year, Charles Schwab echoed this sentiment, suggesting a swift reversal of the carry trade might result in “outsized cross-market volatility.”

A recent poll conducted by Reuters from Sept 8-19 reveals that a majority of economists anticipate the BOJ to terminate the negative interest rate policy and cease the curve control program in the upcoming year.

ING speculates that the central bank might hint at a forthcoming hawkish move this Friday.

“The BoJ is likely to stay pat [on Friday]. It could, however, send a subtle hawkish message to the market after higher-than-expected inflation and a weak JPY, combined with rising global oil prices, pushed inflation up further,” ING said.