Japan Halts Interest Rate Hikes, Easing Pressure on Crypto Market

• Japanese rate hikes fueled the weekend crypto crash.
• The Bank of Japan announced it would pause rate hikes ‘for the time being.’
• Crypto markets show signs of recovery.

The cryptocurrency markets experienced a significant meltdown on Sunday, with the sell-off continuing into Monday morning (UTC). Analysts largely attributed the bloodbath to the unwinding of the yen carry trade due to the Bank of Japan’s (BoJ) recent interest rate hike.

As a result of the BoJ turning hawkish, yen-carry traders find it increasingly unprofitable to borrow yen to buy higher-yielding foreign assets. Cryptocurrencies, being 24/7 liquid markets, have been particularly affected. However, on Wednesday, the BoJ issued a statement indicating a pause in its rate hike program, bringing relief to the beleaguered crypto markets.

Japan Interest Rates on Hold

Following the weekend’s crypto market turmoil, which saw Bitcoin plummet to a 25-week low of $49,000, the BoJ announced a potential pause in its rate hike program on Wednesday.

In a statement to local leaders in Hakodate, BoJ deputy governor Shinichi Uchida said the central bank ‘needs to maintain monetary easing with the current policy interest rate for the time being.’

In March, Japanese interest rates rose for the first time in 17 years, increasing from -0.1% to +0.1%. This was followed by a second increase on July 31, when the BoJ board voted to implement a 15 basis point hike, bringing rates to 0.25% . 

At that time, BoJ Governor Kazuo Ueda hinted at the possibility of another rate rise in 2024, signaling the definitive end to Japan’s dovish policy, which also included buying domestic bonds.

Analysts widely attributed the weekend’s crypto crash to the BoJ’s July rate hike, which made the yen carry trade increasingly untenable. Carry traders borrow yen at nearly zero cost, using the funds to buy higher-yielding foreign assets. But the BoJ rate hikes had put pressure on carry traders, forcing them to unwind their positions by selling foreign-held assets, including cryptocurrencies, to repay yen loans.

Crypto Markets See Relief

Crypto markets showed signs of recovery following the weekend crash, with the BoJ’s potential interest rate pause further easing concerns over the unwinding yen carry trade despite lingering market uncertainty.

Investor Lark Davies offered his perspective on the situation, commenting, ‘The insane carry trade lives, and we will unwind that leverage monster another day.’

Market leader Bitcoin demonstrated resilience amidst the uncertainty, recording a 3.5% intraday upside swing on Wednesday as news of the Japan rate pause spread. 

Meanwhile, futures traders appear to have turned majority short-term bullish. The 4-hour BTC Long/Short Ratio saw a notable shift, with long positions increasing from 48.49% to 51.9%, according to CoinGlass data.

On the Flipside

• Other factors contributed to the crypto crash, including the threat of World War III and the upcoming U.S. elections, which are isolated from the BoJ‘s monetary policy.
• The effect of Japanese rate hikes showed the interconnectedness of legacy and crypto markets.
• Some analysts believe the price recovery is a dead cat bounce, and crypto markets may have entered a new bear cycle.

Why This Matters

While the BoJ’s decision may bring short-term relief to crypto markets, the whole situation highlights the vulnerability of digital assets to global economic forces.

These are the factors blamed for the weekend crypto crash:
What Caused the Crypto Crash This Weekend? Here Are the Key Factors

Opinions are split on whether the weekend crash signaled a new bear market cycle:
Did the Bitcoin Bull Market Survive the Weekend Crash?