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This week, one of the notable developments in financial markets was the loss of value in Bitcoin and the strengthening of the Japanese yen. The Bank of Japan’s (BoJ) decision to raise interest rates and tighten liquidity played a significant role in this change. BoJ’s aggressive move affected global financial conditions, putting pressure on risk assets. The yen’s appreciation not only impacted the Japanese economy but also drew attention to global markets.
BoJ’s Aggressive Policy
The Bank of Japan raised its target for the unsecured overnight interest rate from the 0%-0.1% range to approximately 0.25%. Additionally, it announced plans to reduce liquidity-boosting bond purchases from 6 trillion yen per month starting in March to about 3 trillion yen per month by early 2026. This policy change aims to reduce excessive liquidity in the markets and strengthen the Japanese yen. BoJ‘s hawkish move led to the yen’s appreciation and caused fluctuations in global markets.
These changes also had a noticeable impact on the cryptocurrency market. Bitcoin struggled to maintain its value, trading around $66,000 with a weekly loss of 2%. Expectations of interest rate cuts by the US Federal Reserve increased demand for the “risk-averse” yen. The USD/JPY exchange rate fell to around 150, marking the yen’s strongest performance since March. This situation, along with a 0.4% increase in S&P 500 futures, indicated positive market sentiment.
Yen Affected Global Markets
The yen’s role in global markets is crucial as a low-yield currency that funds investments in high-yield assets. When the yen appreciates, it leads investors to reduce their inclination towards riskier assets, thereby suppressing carry trades. As highlighted in a recent note by BlackRock, the yen’s rise could prompt investors to unwind their carry trades, tightening global financial conditions.
This month, the yen gained approximately 6.4% against the dollar, achieving its highest gain since November 2022. This significant increase particularly affected technology stocks and Bitcoin, which struggled to maintain its upward momentum around $70,000, contributing to risk aversion in the market. The yen’s rise has been a key factor in Bitcoin’s recent price fluctuations and market sentiment.
Looking ahead, the yen’s strength may continue to influence market dynamics. If the Federal Reserve adopts a dovish stance and signals more interest rate cuts, risk aversion could increase, leading to further gains for the yen. Consequently, Bitcoin’s challenging week and the yen’s appreciation once again highlighted the fragility and interconnectedness of financial markets.
