BOJ Rate Hike Looms: Will Tokyo's Move Spark Crypto Sell-Off?

The Bank of Japan is set to raise its key policy rate by 25 basis points to 1% at its June 15-16 meeting, a move that hasn't been seen in over three decades. This decision comes as the BOJ continues its tightening cycle, which began in March 2024, with the goal of addressing persistent inflation, a weakening yen, and rising energy costs tied to geopolitical friction.

The rate hike has significant implications for crypto investors, as every BOJ rate hike since March 2024 has preceded a Bitcoin price decline ranging from 18% to 32%. This correlation is not coincidental, with four hikes leading to four drawdowns in the market.

A Reuters poll of economists projects that the BOJ could push rates even higher, potentially reaching 1.25% by the end of 2026. The yen carry trade, where investors borrow in a low-yielding currency and park the money in higher-yielding assets, is also at play here.

The yen has been the currency of choice for carry trades, but when Japanese rates rise, borrowing in yen gets more expensive, making the trade less attractive. This could lead to a strengthening yen, which would trigger a cascade of selling in risk assets globally, including crypto.