The significant drop in August occurred as a result of the long-awaited interest rate hike and could be more. This scenario, which could negatively affect the performance of cryptocurrencies even in the last quarter, forces investors to focus on the Bank of Japan as much as the Fed. So, what did the president say in his latest statements?
Bank of Japan and Crypto
Bank of Japan President Kazuo Ueda mentions that interest rates could rise further if the economy and inflation progress as projected. The document presented at the government panel led by Prime Minister Fumio Kishida suggests that the economic environment could support interest rate hikes. Even after the increase at the end of July, inflation-adjusted interest rates are negative according to the central bank.
Japan, which has avoided interest rate hikes for decades, has thrown risk assets into significant turmoil with its recent step. Central banks globally have already started cutting interest rates. The US Federal Reserve will announce its first 25bp cut on September 18.
If Japan continues to go in the opposite direction while all this is happening, it could mean a strong depreciation of the dollar against the yen. The yen is widely used in risk credits, and this fluctuation could cause difficulties in loan repayments. Companies and citizens who took yen loans in countries experiencing currency fluctuations had experienced a mini version of this.
What Will Happen to Cryptocurrencies?
BitMEX co-founder and former CEO Arthur Hayes had highlighted this exact issue. In his latest market assessment, he says this problem will become a more pronounced risk for crypto.
“The danger of the yen carry trade unraveling will re-emerge, and unless the central bank expands its balance sheet, i.e., prints money, it could spoil the celebration.”
Carry trade refers to buying a low-cost asset and investing in a higher-risk asset. In Japan, where interest rates have been kept at zero for nearly 20 years, investors were encouraged to borrow. The money flowing into high-yield assets reached significant levels. Deutsche Bank mentions a $20 trillion carry trade as of October 2023. A breakdown here could affect all risk assets, stock markets, and many other things.
