As expectations grow that the BOJ will raise its policy rate to 1.25%, short- and medium-term government bond yields are surging, while bitcoin has shown only a limited response.
Expectations are growing that the Bank of Japan will raise its policy rate to 1.25% at its meeting on Thursday and Friday. Short-term government bond yields have risen rapidly, with the six-month yield reaching 1.34% and the three-month yield 1.25%, both their highest levels since the mid-1990s. Markets are pricing in the BOJ's pace of rate hikes in advance, and long-term interest rates are also expected to continue rising.
The driver is fiscal policy, not inflation. The government has requested a record ¥143 trillion for next fiscal year's budget and raised the assumed interest rate on long-term bonds to 3.8%. Investors are showing a greater focus on the returns from holding government bonds, and the yen market is being reassessed.
Bitcoin's reaction has been muted. As the unwinding of yen carry trades progresses, the yen has risen by about 6% following coordinated intervention by Japan and the United States. The Nikkei Average continues to decline, while BTC has remained around $77,000, posting only a modest gain over 24 hours.
Some market participants believe that signs pointing to the pace of additional rate hikes could mark a phase in which the prevailing yield differential breaks down, but the outlook remains uncertain.