Bank of Japan Adds Uncertainty to Crypto Volatility, Says Trader

As the Federal Reserve's tightening measures appear to be approaching their conclusion, the Bank of Japan has yet to make any significant adjustments to interest rates.

According to Griffin Ardern, a volatility trader at crypto asset management firm Blofin, the Bank of Japan (BOJ) is poised to become a pivotal element influencing global market trends. He remarked, "I believe the BOJ will be the most crucial source of uncertainty in the future. While the Fed and the ECB have followed clear policy trajectories, the BOJ's path remains uncertain, implying that the BOJ is likely to 'surprise' us beyond our expectations."

Since 2016, the BOJ has been guiding short-term interest rates to approximately -0.1% and maintaining the 10-year government bond yield at around 0% through yield curve control (YCC). Additionally, the bank has established a tolerance range of 0.5% above and below the 10-year yield target. In July, the BOJ announced its willingness to let the yield surpass this cap as long as it remains below 1.0%.

These measures, aimed at bolstering liquidity, have exerted downward pressure on global bond yields for an extended period, resulting in the injection of trillions of dollars into the global financial system. This prolonged inclination towards monetary easing has popularized carry trades, a practice involving borrowing in yen and investing in higher-yielding, riskier assets.

Thus, a potential reversal of the negative interest rate policy and adjustments to yield curve control by the BOJ may lead to a strengthening of the Japanese yen (JPY) and could have a cascading effect on risk assets, including cryptocurrencies. While it's widely believed that the tightening cycles of the Federal Reserve, European Central Bank, and other major institutions have reached their zenith, the Bank of Japan has yet to signal any changes in its interest rates.

Griffin Ardern noted:

"Once the BOJ commences the process of unwinding its ultra-accommodative policy, many assets previously acquired through the JPY-USD arbitrage channel [carry trade] may be divested to repay debt denominated in JPY. This, in turn, could exert an unforeseen impact on the crypto market."

Earlier this year, Charles Schwab expressed a similar viewpoint, warning that the carry trade could rapidly unravel, leading to "outsized cross-market volatility."

A majority of economists polled by Reuters between September 8th and 19th anticipate the BOJ to terminate its negative interest rate policy and phase out the curve control program in the coming year. ING suggests that the central bank may hint at this prospective hawkish move as early as Friday.

"While the BoJ is likely to maintain its current stance [on Friday], it might convey a subtle hawkish message to the market in light of higher-than-anticipated inflation, a weakened JPY, and the rise in global oil prices, which have collectively pushed inflation higher," as reported by ING, according to ForexLive.

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