BOJ to Raise Rate to 1.25%, Highest Since 1995; Bitcoin Steady

The Bank of Japan is widely expected to raise its policy rate to 1.25% at its Thursday-Friday meeting, the highest level since April 1995. Short-term Japanese yields climbed sharply ahead of the decision while Bitcoin remained near $77,700.

Three-month government bill yields reached about 1.25% and six-month bills traded near 1.34%, levels not seen in more than three decades. The two-year yield sits close to 1.85% and the 10-year yield touched 3% earlier this month, the first time at that level since 1996.

Inflation has remained below the BOJ’s 2% target. July consumer prices rose 1.9% year-on-year and core inflation was 1.8%.

Ministries have requested a record ¥143 trillion for the next fiscal year, and the Finance Ministry raised its assumed long-term bond rate to 3.8%. Increased issuance expectations have coincided with higher yields on Japanese government debt.

The yen strengthened about 6% from its July low after a combined ¥15.4 trillion currency intervention by Japan and the United States, the first coordinated action of that size since 2011. Speculative positions moved to a net long yen in the week to September 8, a swing of roughly 103,000 contracts. Japanese holdings of U.S. Treasuries fell by $122.6 billion between February and June. The Nikkei 225 has fallen about 8.4% over the past month and stands roughly 13% below its June peak.

Cryptocurrency markets have not mirrored moves in Japanese tradable assets. Bitcoin traded near $77,700 and showed little change while yields, the yen and equities shifted. In August 2024, a BOJ rate rise to 0.25% coincided with a single-session Nikkei decline of about 12.4% and a drop in Bitcoin from roughly $70,000 to about $49,000. A 1.25% policy rate would be five times the 0.25% level set in August 2024.

A recent poll of economists showed 66 of 68 expect a policy rate increase at the meeting, and nearly 90% forecast a policy rate of 1.50% by the end of March. Market participants are focused on the BOJ’s forward guidance on the pace of future rate increases and how that guidance may affect pricing in bond, currency, equity and crypto markets.